George Mason University

News at Mason

A Mason professor explains how consumers win with zero-fee investing

August 6, 2018

Derek Horstmeyer

Fidelity Investment’s announcement that it will offer individual investors two index funds without management fees is a real win for consumers, a George Mason University professor said. 

Derek Horstmeyer, a finance professor in Mason’s School of Business, said the move could save individual investors hundreds of thousands of dollars. It could also spur more people into the market as other investment houses also reduce fees to zero.

“They are basically offering you instant diversification and management of a fund for free,” said Horstmeyer, who has written on the subject for the Wall Street Journal. “It’s very big milestone, in my opinion.”

How much can people save by investing without fees?

The New York Times reported on a Security and Exchange Commission model that showed a $100,000 portfolio that grew at 4 percent annually for 20 years would be worth $220,000. A 1 percent annual fee would subtract $28,000. Had that $28,000 been invested, the fund would have grown by another $12,000, meaning the 1 percent fee caused a $40,000 loss.

Clearly, reducing fees to zero is a money loser for Fidelity, Horstmeyer said. But the chance to bring in new—likely younger—investors, means a long-term selling opportunity.

“The hope is you get their business now and you can sell them products in the future like retirement management services, 401(k) rollovers, things like that,” he said.

Horstmeyer figures it is only a matter of time before the other big investment firms also go to zero annual fees. Vanguard, for example, charges a 0.14 percent fee for similar fund offerings, according to USA Today. Charles Schwab charges 0.03 percent.

“And the bizarre thing is, what’s left to go?” Horstmeyer said, musing about the competition between firms. “Could there be a negative fund? That might be the next step. ‘Sign up with us and have $10,000 in your account at all times, and we’ll give you a bit of money every month.’ ”

Derek Horstmeyer can be reached at 703-993-9761 or dhorstme@gmu.edu.

For more information, contact Damian Cristodero at 703-993-9118 or dcristod@gmu.edu.

About George Mason

George Mason University is Virginia’s largest public research university. Located near Washington, D.C., Mason enrolls more than 36,000 students from 130 countries and all 50 states and Washington, D.C. Mason has grown rapidly over the past half-century and is recognized for its innovation and entrepreneurship, remarkable diversity and commitment to accessibility.