00:00My understanding is that this fee in some form applied to mutual funds.
00:06So what does it mean that we're now seeing it expand to ETFs as well?
00:10Yeah, so first I want to say that I loved my time at Fidelity.
00:14I have nothing but the highest respect for the company.
00:17And this is the first time in all of my association with them
00:20that I've just disagreed on a policy that they've instituted.
00:24If ETFs were to go back to what mutual funds did,
00:27whether the opaque fee structures and the non-transparent kind of disclosures,
00:34then it would be kind of undermining the core promise of ETFs,
00:39which is transparency, low cost, and accessibility.
00:43So policies like this violate all three of those things.
00:48And it hurts the smaller issuers the most,
00:50which tend to be the more innovative, more creative products.
00:54You know, I know the guys at Round Hill who are DRAM is getting hit by this now.
00:59We started around the same time.
01:00I don't know that we'd be here today if this fee structure had been in place then.
01:05So the criticism on this fee structure is this is essentially pay-to-play.
01:08In order to get your ETFs available to all the platform users, you've got to pay up.
01:14And if you don't pay up, then eventually the end user will pay up.
01:16Is that fair?
01:17It is. It's pay-to-play, but it's like 10 times what normal pay-to-play asked for to begin
01:22negotiations with.
01:24And it's kind of using the customer experience as a tool in the negotiations.
01:30And it's non-transparent.
01:31So the customer, you know, like the DRAM customers who are complaining online now,
01:35have no idea what's going on.
01:37They get hit with this fee at the point of trade.
01:39And there's also no way for investors to evaluate their ETFs meaningfully if they don't know the hidden fee structures
01:48underneath.
01:49Let's go over the fee.
01:51So there's, what did you say, 75 ETFs that are on this.
01:54DRAM is the big one.
01:55That's a popular ETF.
01:57If you put in an order, it charges you 5%, but up to $100.
02:02So if you put in an order of like $20,000 or more, it's $100 capped below $20,000 or
02:09something like that.
02:09It would be 5%.
02:10$2,000, yeah.
02:12Right.
02:12$2,000, it hits $100.
02:13Right.
02:14So that's a good amount of money.
02:16And what should they do?
02:18Like if you were them and you were like, hey, we should treat mutual funds and ETFs fairly,
02:22how would this work in a way that would be good for everybody?
02:26Yeah.
02:26So I actually think they and Schwab have an opportunity here where you could institute a fee.
02:31But, you know, pay-to-play has been done before, but it's been done by other firms in a more
02:36transparent, more consistent way.
02:37So instead of negotiating every individual ETF issuer differently, of course, the big guys are going to get an advantage
02:43there.
02:44They're going to stifle competition and put an artificial constraint on new issuers.
02:51Instead, we just do it transparently, consistently, and, you know, the same for everybody.
02:56Don't use customers as a part of your negotiation process.
03:00Well, Perth, I'd love to hear your perspective on what you think this means for the ETF industry at large,
03:07sort of the net effect here.
03:08Because, again, if you think about the decision tree, it seems like issuers can eat this cost themselves
03:13or they can pass it on to the investor on these brokerage platforms.
03:19If they choose to, you know, sort of take on and absorb that cost themselves, do you think that, you
03:24know, this is going to result in higher fees on average to sort of cover that cost?
03:29It will drive up the cost for the entire industry.
03:32That's why I don't want to see the industry going this direction.
03:35I don't want to see us going back into the mutual fund dark ages where nobody knows, you know, what,
03:40you know, what the fees are.
03:41Nobody knows the visibility of the funds that they're seeing is different for every issuer because the deals are different
03:48behind closed doors.
03:49It should be clear.
03:51It should be transparent.
03:51It should be disclosed to clients across the board.
03:55Do you think we will see 12B1 fees come back to ETFs?
03:59You know, 12B1 fees, people forget.
04:01This was like the mutual fund telling you, let's take your money and we'll market the fund.
04:06Then we'll get big.
04:07And if we get big, we can share economies of scale and lower the fee.
04:10But you've got to fund some in the beginning.
04:12Yeah.
04:12And they also forgot the second part of that deal.
04:15And so it became another part of why mutual funds are not, nobody likes them.
04:21Do we think ETFs will just launch with 12B1?
04:24Then the firm can just be like, well, that's part of the fee and then pay Fidelity and Schwab with
04:30that.
04:30I think it's a highly likely outcome of this because 12B1 fees are already in everybody's prospectus.
04:37Nobody's just nobody uses it yet in ETFs world because we don't have to.
04:41At Fidelity, when we told clients about 12B1 fees, we said, hey, this is a fee that doesn't help you
04:47at all.
04:47It just helps the issuer market the fund.
04:50It doesn't go to you at all.
04:51So that's how I sold 12B1 fees or explained it to clients while I was at Fidelity.
04:56Fidelity is a firm that is known for customer first.
04:59They're known for transparency.
05:00And for a firm like that, there's just a lot of opacity around this process.
05:05I like the contrast that you make about Fidelity and how it's known as customer first and then bringing in
05:09this whole fee structure.
05:12Fidelity has done it.
05:13Schwab is doing it.
05:14Who else is next?
05:15I mean, is this going to become the standard?
05:17I hope not.
05:19I mean, that's why I'm speaking out now because we're running out of time.
05:22You know, Schwab has come out and said we're going to do this.
05:24If it were stopping with Fidelity, I would have been silent.
05:27But this is spreading across the industry.
05:30If, you know, Schwab, Pershing, everybody does this, no doubt 12B1 fees or similar will come into play.
05:36ETFs will inherit the inefficiency of the mutual fund ancestors, which we really don't want the baggage of.
05:44Well, I'm really curious to dig into that decision tree again from the standpoint of the issuer, you know, whether
05:51or not to sort of eat this cost yourself or push it on to investors.
05:56I mean, how are you handling that personally when it comes to your products?
06:00Yeah, so in this case, I think for existing products, ETF issuers, if they have to pay the fee, would
06:06have to probably eat it themselves because there is no raising fees for us, right?
06:11You don't ever raise fees.
06:13And that's part of the problem here, too, is Fidelity is supposed to be known for, you know, having everything
06:19that's available on the exchange with no commission, just like IBKR, just like Schwab.
06:25These are brokerage houses, right? Not wire houses. So now you're getting into kind of muddling the waters here where
06:32they're imposing a cost ex-post that wasn't there before.
06:37So we have to eat it for now. The next product is going to factor it in. And that goes
06:43down to the end investor. And I don't want to see that.
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