In the Race to Zero Fees, Transparency Loses

Financial Planning

 Chris Kerckhoff By: Chris Kerckhoff

The financial services industry is no stranger to competition, and you’ve likely heard of its latest game: the race to zero fees.

On the surface, providing services at no cost sounds like another leap forward in disrupting outdated business models, but it’s not that simple. All too often, no cost means no transparency. The financial services industry is like any other business. With all due respect to Vanguard, which is run at cost, there are no—and will never be—any charities operating on Wall Street.

No Free Lunches in Business

Even outside of the financial services industry, we’ve seen recently what happens when people only think they are getting services for free. Whether via a software or social media platform, consumers increasingly learning that their personal information has been sold or compromised. The news is full of these cautionary tales, which further underscores the point that every company must make money somehow. Sometimes, it’s through advertising; others, it’s by selling clients’ personal information they never realized they signed away in the “click here to agree” fine print.

It seems very clear that people want transparency regarding what’s happening with their information— and what “free” actually means.

The Truth about Transparency

The press continues to call out “freemium”-based digital services, and it seems like the financial services industry may be next. Far from increasing transparency, the race to zero fees actually decreases it. Custodians and fund companies have overhead and operating costs just like any other business—which means they must make money somewhere. Just because the end consumer may not see the fees and expenses doesn’t mean they’re not there.

RobinHood recently caught flack for actually making a surprising amount of revenue from high-frequency traders. Despite advertising themselves as transparent and commission-free, they are actually profiting from their clients’ order flow. Even worse, they’ve started reporting order flow payments as percentages per “dollar of executed trade value” rather than the standard “per share” to make the revenues seem lower to an untrained eye.

A Narrowing Line of Sight

For me, the race to zero fees poses a threat to our clients. If the financial industry continues to change just so fees seem to be zero, our line of sight—and, therefore, ability to be transparent with our clients—also narrows. Rather than clearly outlining the specific fees incurred on transactions, advisors will be forced to explain the implicit costs and fees that have already been baked into fund prices – something clients are less likely to understand or care about.

I have been in meetings with peers who pushed custodians to implement zero transaction fees. We certainly do everything possible to keep our clients’ costs low, but there comes a point where something has to give. And, too often, that something is transparency.

What Clients Really Want

It’s become increasingly apparent that consumers value transparency. Investors want to know their true costs and how to determine if a given service is worthy of the stated price. With the mountain of assets that have shifted into passive and rules-based investment vehicles, the preference for lower costs is clear. However, there is a big difference between low cost and free.

Fiduciary care has a cost. Wall Street and financial services firms have a poor track record on transparency. Low total cost to investing, which is disclosed with full transparency, is a fantastic benefit to investors. “Free” is a movement away from giving clients the information they need to make an informed decision.

Rather than race to zero, our industry should be focused on the race to full transparency.


If you’re considering hiring a financial advisor, a good place to start is with this “12 Questions” guide. Any advisor should be able to answer these questions clearly and easily, and it will give you a good baseline against which to compare your options. If you have any questions, please don’t hesitate to reach out to the Plancorp team using the form below.

Plancorp does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.

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