How Fidelity makes money without commissions

How Does Fidelity Make Money?


How does Fidelity make money with zero commissions and on cash balances? How Fidelity gets revenue from with free trades, no commission products, brokerage fees?


How Does Fidelity Make Money?


If you have seen Fidelity’s pricing structure, you might be curious about how the broker makes money. It has long been the case that brokers bring in a large portion of their revenue through trade commissions. That used to be the case for Fidelity, as well. However, they no longer charge commissions on most trades.

Now that Fidelity has stopped taking trade commissions from its customers, the broker focuses on other sources of income. Some of the ways Fidelity makes money are straightforward, but others might surprise you.

Keep reading to see how Fidelity makes money.


How Fidelity Makes Money With Zero commissions


How Fidelity Makes Money


Fidelity doesn’t charge any commissions on trades. They also don’t charge for most account services or banking fees. You also won’t pay for account transactions such as deposits, account transfers, or ATM transactions. So how does Fidelity make its money? Here are some of the primary ways that the broker uses.

Margin interest rates for trading activities and loans are one way. Interest paid on money market funds and cash sweep programs is another. Fidelity also charges for automated advisory services, personal advisory services, and professionally managed portfolios. Fidelity also charges a commission on some securities like bonds, mutual funds, and some international stock.

Here’s a breakdown of how Fidelity makes money.


Selling Order Flow


One common way commission-free brokers earn money from investment transactions is by selling order flow. High-frequency trading firms pay good money to receive order information as it is routed to the exchanges. These types of firms seek to profit from the bid-ask spreads. Some argue that brokers may not have their investors’ best interests at heart when they sell order flow to these types of firms, and others do not see any problem with it.

Suppose the practice of selling order flow makes you feel uncomfortable. In that case, you’ll be happy to know that Fidelity does not participate in order flow sales to compensate for the lack of commissions.


Margin Interest Rates


Fidelity charges margin interest rates, and we can certainly count margin interest as one of the broker’s revenue streams.

Whether you are looking to short stocks, bolster a position by borrowing funds, or using margin for any other reason, you will pay margin interest for the privilege. Fidelity prices its margin interest rates based on account size, so the bigger your account is, the less margin you will pay.

Margin rates are always subject to change due to various factors, but rates go from 9.075% to 4.750% for accounts ranging from $0 to over $1M.


Fidelity vs Competitors


Broker Review Broker
Rating
Stock/ETF
Fee
Mutual Fund
Fee
Option Promotion Offer
WeBull
4.5-star brokerage rating

$0 na $0 6 FREE stocks valued $34-$12,600 give-away at Webull.
Firstrade
Firstrade rating

$0 $0 $0 Get 2 FREE stocks and $0 commission in ALL trades!
Fidelity
Fidelity Investments rating

$0 $49.95 $0.65 Get $0 stock commissions.
TD Ameritrade
TD Ameritrade rating

$0 $49.99 ($0 to sell) $0 commissions + transfer fee reimbursement.


Fidelity Makes Money With Loan Programs


In addition to margin rates from trading activities, Fidelity offers margin loans that use the same base rates. Margin loans provide a significant boost to the broker’s income for a couple of reasons. The primary reason is that margin loans backed by securities in a borrower’s brokerage account are often quite sizable. They can take longer to pay back than borrowing to short stocks or establish a long position using margin.

Margin interest rates for loans are the same as those for trading, but some adjustments are made depending on the loan size and other factors.


Cash Sweep Program


Fidelity also makes money via its cash sweep program(s). Fortunately, they also allow investors to earn money on these as well.

Fidelity has two main approaches to managing uninvested funds.

The first is to use a money market fund as the ‘core position’ in all Fidelity brokerage accounts. This feature is enabled by default, and investors can choose between SPAXX or FZFXX funds to use a core position. Both investors and Fidelity make money from this arrangement.

Fidelity also uses a series of partner banks for its cash sweep program. Investors should sign up for a cash management account to activate cash sweep. Once open, uninvested cash is swept into program banks. While it is there, interest accrues. Fidelity pays investors a very small (0.01%) interest rate on funds in program banks. The rate is so low because Fidelity also takes some of that interest.


Managed Portfolios, Planning, and Advice


As a full-service broker, Fidelity provides many different opportunities to its clients. Included in these opportunities are managed portfolios, planning services, and professional advice.


Fidelity Go


To use the Fidelity Go robo advisor service, investors with accounts ranging from $10,000 to $49,999 pay a $3/month fee. Investors with accounts of $50,000 and above pay a fee of 0.35% per year.


Fidelity Personalized Planning and Advice


Fidelity’s ‘personalized planning and advice service’ comes with a 0.50% fee. Account holders with account sizes of at least $25,000 can take advantage of this hybrid robo advisor service.


Fidelity Wealth Management


For larger accounts, Fidelity provides dedicated advisory services. The first of which is Fidelity Wealth Management. This service costs from 0.50% to 1.50%. Investors need at least $250k to use the dedicated advisory service.


Fidelity Private Wealth Management


The second dedicated advisory service is Fidelity’s private wealth management service. Investors pay from 0.20% to 1.04% for this service. To take advantage of the lower advisory rates, investors need to maintain an account balance north of $2M.


Account Management


For many brokers, account management services such as deposits, withdrawals, account transfers, account closures, insufficient funds, and many others provide a steady revenue stream. At Fidelity, that is not the case.

Investors never pay anything for account services like these. Here is a comparison from Fidelity’s website:


How Does Fidelity Make Money


Fees Related to Options, International Securities, Mutual Funds, and Bonds


Although Fidelity is a no-commission broker, there are some trading activity fees that the company makes money from. These trading fees are for options trades, (some) international securities, (some) mutual funds, and (some) bonds. The broker seems to be doing its best to keep fees at a minimum, but some are unavoidable. Here’s what you can expect to pay if you invest in any of these securities.


Fidelity Makes Money With Options


Options trades come with 0 commissions, but there is a $0.65 clearing fee for each contract.


Fidelity Makes Money With Bonds


New issues of bonds are free at Fidelity, but secondary issues cost $1.

New issue U.S. Treasury products are also free, but secondary issues have a fee of $19.95.


Fidelity Makes Money With Mutual Funds


Fidelity’s mutual funds are free. NTF (no transaction fee) funds from other financial institutions are free to buy, but Fidelity charges a flat rate fee of $49.95 for selling funds under a two-month threshold.

Transaction funds (not from Fidelity) come with a fee of $49.95 to establish the position. To compare, Ally Invest in charging $9.95 for the same mutual funds and JP Morgan Chase is at $0.


Foreign Stock


Some foreign stock is DTC (Depository Foreign Trust Company) and is free to transact at Fidelity. Stock from foreign companies that are not DTC comes with a $50 fee. The fee is charged on a per trade basis.


Fidelity Charitable ‘Giving Account’ Fees


Fidelity has a Giving Account that allows donors to grow their charitable contributions over time. The fees for this account include an annual administrative fee of 0.60% or $100 (the greater number is paid) and investment fees ranging from 0.015% to 0.99%.


Which Fees and Payments are Passed on to Customers?


Another way that Fidelity makes money is by passing specific regulatory and clearing fees on to its customers. This is a widespread practice now that commission-free trading has become the norm.

Fees that you can expect to pay come from the OCC (Options Clearing Corp), FINRA (the Financial Industry Regulatory Authority), and SEC (Securities and Exchange Commission). These fees amount to fractions of a penny per trade unless you are trading huge positions, but they certainly add up for Fidelity.


Fidelity Review


Read detailed Fidelity review.


Visit Fidelity Website



Open Fidelity Account


Updated on 5/30/2022.


Ben Wright
About the Author
Ben Wright is an investor, a trader, an educator, and something of an explorer. He spends his days in the markets when he is not teaching or spending time with his family. Ben writes about stockbrokers, markets, investment vehicles, promotional offers, and tools that help investors make the most of their time in the markets.