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Fidelity Investments, commonly known as Fidelity, is one of the largest financial services firms in the world. Established in 1946, it offers a wide range of investment and financial management services. While many people know Fidelity for its mutual funds and retirement accounts, the company generates revenue through a variety of channels. In this article, we’ll explore how Fidelity makes money, dissect its primary revenue streams, and explain its business model.

Fidelity’s Business Model Overview

Fidelity operates as a diversified financial services firm, catering to both individual investors and institutions. It earns money by providing investment management, brokerage services, and other financial products. Fidelity’s revenue streams are largely based on the assets it manages, trading activity, and associated fees.

Here’s a detailed look at its primary revenue channels:

1. Asset Management Fees

Fidelity manages trillions of dollars in assets for individual and institutional clients. It offers a range of mutual funds, exchange-traded funds (ETFs), and other investment products. These generate income through management fees.

• Mutual Funds:
  Fidelity charges an annual management fee, expressed as an expense ratio, to manage its mutual funds. While Fidelity offers zero-expense-ratio funds for some products, its actively managed funds come with fees ranging from 0.5% to 1.0% or more, depending on the fund.
  For example:
  • A mutual fund with a 0.75% expense ratio generates $750 annually for every $100,000 invested.
• Exchange-Traded Funds (ETFs):
  Fidelity’s ETFs are another source of income. Although ETFs typically have lower expense ratios than mutual funds, the volume of assets makes this a significant revenue stream.

2. Brokerage Commissions and Margin Interest

Commission-Free Trading

Fidelity offers commission-free trading for stocks, ETFs, and some options. While this service is marketed as “free,” Fidelity still generates revenue through the following:

• Payment for Order Flow (PFOF):
  When clients place trades, Fidelity directs those orders to specific market makers or exchanges. These entities pay Fidelity for routing the trades, a practice known as PFOF. Although controversial, it is a significant source of revenue in the brokerage industry.
• Interest on Idle Cash:
  Fidelity earns money by investing the cash sitting in customers’ accounts. This is known as “cash sweep” revenue, where client funds are pooled and invested in low-risk securities, such as money market funds.

Margin Trading

For clients who borrow money to trade using margin accounts, Fidelity charges interest. These rates are tiered and can range from 5% to over 10%, depending on the amount borrowed. Margin trading is a high-margin revenue source for Fidelity.

3. Financial Advisory Services

Fidelity provides financial advisory services for both individual and institutional clients. These services include retirement planning, wealth management, and estate planning.

• Fidelity Personalized Planning & Advice:
  This hybrid advisory service combines human advisors with digital tools. Clients pay a management fee, typically around 0.35% of their portfolio annually, for this service.
• Fidelity Wealth Management:
  For high-net-worth individuals, Fidelity offers dedicated financial advisors and customized investment strategies. Fees for wealth management services are generally higher, ranging from 0.5% to 1.5% of assets under management (AUM).

4. Retirement Services

Fidelity is a leading provider of retirement accounts, including 401(k) plans, IRAs, and 403(b) plans. The company earns revenue by:

• Plan Administration Fees:
  Employers pay Fidelity to administer 401(k) plans, which include record-keeping, reporting, and compliance services.
• Investment Management Fees:
  Fidelity earns fees from managing the mutual funds and ETFs offered within these retirement plans.
• Participant Fees:
  Some 401(k) plans charge participants small fees for services like loan processing or account management. Fidelity takes a portion of these fees.

5. Technology and Outsourcing Services

Fidelity provides technology and operational services to other financial institutions through its Fidelity Institutional business.

• Platform-as-a-Service:
  Fidelity offers brokerage platforms, trading technology, and clearing services to smaller financial firms. These firms pay Fidelity for access to its infrastructure.
• Workplace Solutions:
  Fidelity also earns revenue by providing employee benefit programs to companies, such as health savings accounts (HSAs), stock plan administration, and retirement plans.

6. Interest Income from Lending

Fidelity makes significant income by lending securities and cash.

• Securities Lending:
  When investors hold certain securities in their accounts, Fidelity can lend those shares to institutional investors or short-sellers. In return, Fidelity earns interest or fees.
• Fixed-Income Investments:
  Fidelity also earns interest from its bond and money market funds, reinvesting customer assets into fixed-income instruments.

7. Proprietary Products and Services

Fidelity offers its own line of financial products, which include life insurance, annuities, and credit cards. These products generate revenue through:

• Premiums: Fidelity sells life insurance and annuities, collecting premiums from policyholders.
• Credit Card Partnerships: Fidelity-branded credit cards offer rewards that are deposited into investment accounts. Fidelity earns a portion of the interchange fees from these cards.

8. Educational Resources and Upselling

Fidelity provides free educational resources, tools, and seminars to attract new clients. While these resources don’t directly generate revenue, they serve as a gateway for upselling premium services and investment products.

9. International Operations

Fidelity has a global presence, offering investment products and services in various international markets. Revenue from international operations comes from:

• Mutual funds and ETFs sold abroad
• Institutional services for non-U.S. clients
• Brokerage services tailored to international markets

How Fidelity Balances Free Services with Profitability

Fidelity has disrupted the financial industry by offering zero-expense-ratio funds and commission-free trading. These moves attract new customers and increase the overall assets under management (AUM). With more AUM, Fidelity earns higher fees from its actively managed products, advisory services, and ancillary offerings.

Conclusion

Fidelity’s revenue streams are diverse, ranging from asset management fees and brokerage activities to advisory services and retirement plan administration. Its business model relies on attracting customers with low-cost or free services while monetizing through ancillary products and services. By balancing innovation and profitability, Fidelity has maintained its position as a leader in the financial services industry, proving that growth and client-centric approaches can go hand-in-hand.