How does Fidelity make money off me?

Question

I have an IRA account with Fidelity which I use to buy a handful of Fidelity mutual funds. Since they are Fidelity mutual funds, Fidelity does not charge commission on them.

So how then does Fidelity make money off a customer like me?

Answer 1

The Fidelity funds have an expense ratio, and while some funds may have little to no profit, having you as a customer lets them try to sell you on their managed account/portfolio and other services.

It's possible they don't make much or any money from you at all, but with so many accounts it's fine as long as it averages out. Similar to having a credit card and never paying interest on it, but reaping the rewards anyway. Averaged out, they make plenty of money across all accounts.

An expense ratio is usually given as a percentage, and it's the amount you pay for the fund per year. If it has a 1% ER, and you have $1,000 invested in it, then it costs you $10 for the year (a very simplified example). You won't notice this as a direct transaction since it gets taken from the funds assets directly, but this is lowering the return (or worsening the loss) on the fund.

You can find the ER in your Fidelity account for any funds that are available to you.

Something else I thought of is that you add liquidity to their funds, and your assets increase the amount "under management" which may be a selling point, may lower overall costs, etc.