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No-Transaction-Fee Platforms May Cost Investors

Morningstar’s Kevin McDevitt writes that, while convenient, no-transaction fee (NTF) platforms, such as Charles Schwab’s OneSource, may add costs for investors. McDevitt points out that investors do not see directly how much they are paying to the platform because the funds pay the fees instead. The article notes that Schwab has collected $216 million in fees in the third quarter alone through the platform and is on track to garner more than $800 million for the year, resulting in an average fee of 32 basis points. McDevitt points out that fees for the platforms have increased steadily since the 1990s, despite the effect of technology and the increasing tendency for investors to place online orders as opposed to over the phone.

In an attempt to assess the effect of offering a fund on an NTF platform, McDevitt compared the expense ratios of funds listed on Schwab’s OneSource to funds that are not. He found that funds not participating in OneSource typically offered lower fees, a result that holds up across asset classes except when looking at alternative funds on an asset-weighted basis. According to the article, some of the disparity can be accounted for by Vanguard funds (managed at cost), but nevertheless the fee disparity holds true when these funds are removed. McDevitt admitted that it was “impossible to know for certain whether the higher expenses for this latter group are attributable to the fees charged by NTF platforms,” but that “[i]t's an interesting comparison nevertheless.”