Schwab’s ETF platform fees could raise client costs

Charles Schwab began charging third-party ETF providers platform fees of up to 15% of their management fees on Oct. 1. The fees apply to ETFs offered through Schwab’s brokerage platform and could increase costs for advisors and investors.

The fees are negotiated separately with each ETF provider. Schwab’s disclosure says compensation may take the form of a flat fee, an asset-based fee tied to ETF holdings at Schwab or another arrangement. The amount, structure and timing of payments may differ by provider and product.

Schwab has not disclosed how the fees will vary or which factors will determine them. Providers will join the program under individual agreements as they are established.

ETF sponsors may absorb the costs through lower margins, increase their funds’ expenses or pass the fees to investors. If sponsors pay from fund assets, the costs could be included in an ETF’s operating expense ratio, which measures the annual expenses charged to investors.

Advisors who use Schwab Advisor Services may need to consider the fees when selecting ETFs for clients. Brad Wales, founder of consulting firm Transition to RIA, described BlackRock, State Street Global Advisors and Invesco as providers that might initially absorb the costs. He added that passing at least part of the expense to investors was more likely.

Advisors could try to offset higher ETF costs by lowering their own fees, Wales noted, although he described that option as difficult in practice.

Schwab acts as custodian and provides other services to more than 16,000 registered investment advisers through its Schwab Advisor Services division. The company will not charge the new platform fees on its own ETFs.

Schwab’s disclosure identifies a potential conflict of interest because the company has a financial incentive to establish and maintain relationships with ETF firms that pay the fees.

“Schwab is charging its rivals for access to the very platform where it competes with them,” Tim Welsh, founder of Nexus Strategies, said. “Those rivals can accept thinner margins, raise prices or have their investors hit with a ticket fee, and each choice helps Schwab’s own ETFs.”

It is unclear how Schwab will treat providers that decline to pay. Vanguard and Dimensional Fund Advisors are among firms known for refusing revenue-sharing payments to brokerage companies that distribute their products. Welsh expects larger providers such as Vanguard and iShares to have more negotiating power, while smaller firms may be more likely to pay.

Fidelity Investments introduced a similar policy in late 2024, charging ETF providers up to 15% of their annual management fees. Providers that do not pay Fidelity’s asset-based fees can have investors charged 5% of the amount invested in individual ETFs, up to $100 per transaction.

The fees provide brokerages with another source of recurring revenue after the industry largely eliminated commissions on trades of individual stocks, ETFs and other securities. Brokerages have also faced lower mutual fund revenue as investors have shifted toward lower-cost ETFs.

On an April earnings call, Schwab Chief Executive Rick Wurster described firms on the company’s platform as earning high margins while Schwab brought them clients and provided infrastructure. He said Schwab was seeking a larger share of that revenue.