Do-It-Yourself investors got an early Christmas present this month as Fidelity Investments announced the launch of two commission-free mutual funds. Some are calling it "the shot heard round the investing world." The move will have a major impact on investing's built-in costs as other brokerage houses scramble to compete with Fidelity’s fee-less mutual funds. Rob West, president of Kingdom Advisors, has details on how this could affect your portfolio.
There has long been fee competition among brokerage firms and fund companies but Fidelity has now won "the race to free." Fidelity is a major player in the industry with nearly two and a half trillion dollars in asset management. A lot of investing firms have mutual funds — Fidelity itself has nearly a thousand of them.
- The average actively managed mutual fund charges between 1.25 and 1.5% per year. The average index fund (which is what Fidelity is offering free) expense ratio is around .2%.
- Fidelity’s two new commission-free offerings are index mutual funds. The Fidelity ZERO Total Market Index Fund will invest in the largest 3,000 U.S. companies.
- The Fidelity ZERO International Index Fund will hold the top 90 percent of stocks within developed and emerging countries.
- The bottom line is that this isn’t a huge savings in dollar amounts, but it sends a statement about the future of investment fees and expenses.
- How does Fidelity make any money on those funds without charging a commission? Think of it as a loss-leader at the grocery store. Fidelity is just trying to get new customers in the door. Once they’re in, Fidelity has plenty of other products and services to sell them.
- Who’s the big winner? - Anyone who invests in mutual funds but particularly do-it-yourselfers who just want to buy a share of the domestic or international market. Those investors should see a bump in their portfolios.
This is also going to have a major impact on retirement plans — 401(k)s, 403(b)s and other defined-contribution plans. People who invest in them are often paying hefty fees and they’ll want to know why when free index-based mutual funds are available.
Next, Rob and Steve answer some listener questions at 800-525-7000 or via email at Questions@MoneyWiseLive.org:
- If you're 75 years old, living on your pension and Social Security and have been advised to roll your 403(b) over into a guaranteed-monthly-income-for-life annuity, should you continue to just use the 403(b) RMD or roll the account over?
- If you're 54, single with no children, should you consider life insurance?
- If you want to find Christian-based mutual funds, where should you look?
- If your spouse just passed away leaving you with a 401(k), what should the next steps be?
- If your two young-adult children just inherited $5000, what are some recommendations for this money?
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