How does Fidelity make money?

By   |   Verified by Andrew Boyd   |   Updated 24th June 2021

How Fidelity makes money
  • Fidelity is one of the largest discount brokerage firms in the world.
  • The company prides itself on order execution, generating significant price improvements for its investors.
  • Fidelity’s personalized customer service and array of digital solutions appeal to a wide customer base.

Fidelity is one of America's leading discount brokerage services with 35 million customers and over $10 trillion in assets. It faces stiff competition from other brokers, many of whom charge no commission and use payment for order flow to fund their business operations.

How does Fidelity do it? Find out what sets Fidelity apart from its competitors and how Fidelity makes its money in this guide.

Introduction

Fidelity makes money by charging its clients fees for the management of accounts and other services. Despite being one of the largest no-commission brokers, Fidelity doesn't use the payment-for-order flow model used by so many of its peers like Charles Schwab, TD Ameritrade, and Robinhood.

Fidelity has an excellent reputation, and it's one of the best low-cost platforms for day traders. The company focuses on providing traders with better order execution and cash management services to help traders grow their accounts.

What does Fidelity do?

Fidelity is one of the largest discount brokerages in the United States. The company has an intelligent investment platform with options for managed or self-directed investment strategies. Fidelity offers a well-rounded investment platform with a multitude of tools and research resources, along with easy order placement and entry for the average investor interested in a buy-and-hold strategy.

The Fidelity Active Trader Pro platform offers traders real-time data subscriptions, along with a customizable trading platform interface for active day traders. The only downside to trading through the platform is that the company doesn't offer trading in commodities futures and options contracts.

However, Fidelity does offer excellent order execution, and it continues to evolve as a leader in the brokerage space. The form provides a high-quality trading experience for newcomers to the market and seasoned professional day traders.

How does Fidelity work?

Fidelity offers an easy sign-up process. The company provides trading accounts for accredited and non-accredited investors, and there's no application of the PDT rule to trade the markets. Investors can access cash or margin accounts, with a huge range of stocks and ETFs available to trade through its online or mobile platform.

It's a good choice for first-time investors that want to purchase fractional shares in companies. Traders can enter the dollar amount they want to spend on a stock rather than entering how many shares they want to buy.

The mobile app also has a great range of stocks and ETFs for traders to buy. However, the desktop trading client is the better choice for the seasoned day trader.

All Fidelity clients have the option of trading IPOs and foreign ORDs, as well as preferred warrants, rights, and Treasury Inflation-Protected Securities (TIPS). Fidelity also offers trading in High Yield Corporate Bonds and Municipal Resets, and Principal Protected Notes.

While Fidelity doesn't offer clients the ability to trade in cryptocurrency markets, account holders can use the FullView feature to review their holdings on Coinbase.

How Fidelity makes money

Fidelity makes money from interest on cash held in custody for clients, stock loans to short-sellers, and portfolio margining.

Interest on cash

Fidelity automatically enrolls all its clients in the sweeps programs where they have the opportunity to receive a higher interest rate on deposits than with other brokerage firms. Fidelity makes money on the difference between what it pays the clients on idle cash and what its institutional partners are willing to pay to borrow Fidelity’s cash on hand.

It's important to note that all financial institutions carry out this practice; it's how the financial system stays liquid and afloat.

Stock loan programs

Fidelity also earns revenues on stock loans to short-sellers. Fidelity collects short interest on its stock loan programs and splits that with the clients that lend it stocks that are challenging to borrow.

Surprisingly, Fidelity is one of the only leading brokers that doesn't engage in the practice of payment for order flow.

Payment for order flow

Surprisingly, Fidelity is one of the only leading brokers that doesn't engage in the practice of payment for order flow. Many of the larger firms like TD Ameritrade route customer orders through high-frequency trading firms (HFTs). The HFT arbitrages the client's order in a nanosecond, collecting a tenth of a cent in commission on every order placed by the broker's client base. Some experts state this practice is unethical, making the client the products. Fidelity is one of the few firms left that don't institute this practice. Instead, they collect fees for specific trading services.

Price improvement

Fidelity prides itself on order execution and clients get a healthy rate on price improvements on equity orders. Typically, equity orders with Fidelity save investors $19.17 on average for a 1,000-share stock order.

Portfolio margining

Fidelity is primarily a discount broker, meaning that it allows for the self-direction of client portfolios by the trader. However, the company also offers managed broker accounts for larger account holders.

Future growth engine

Fidelity wants to focus its development plans on improving its user experience across all its platform features.

The company is working to stay ahead of competition by embracing a more digital future. In 2015, they were one of the first companies to accept bitcoin donations for Fidelity Charitable. In 2018, Fidelity established Fidelity Digital Assets, which provides services to institutional bitcoin investors. In 2020, Fidelity saw 60% growth in the usage of their digital platforms. They plan to develop their digital solutions to continue this growth.

Fidelity also remains focused on their more traditional investors who may need additional guidance. In 2020, Fidelity increased their client-facing representatives by more than 75%, due to a record high number of registered investment advisor accounts at the firm.

Competitors

As a leading discount broker, Fidelity faces stiff competition in the market. Other brokers like TD Ameritrade, E*TRADE, Charles Schwab, and trading apps like WeBull and Robinhood present a threat to Fidelity's market share.

However, the company doesn't work with the payment-for-order flow model used by its competitors. Therefore, we think that Fidelity presents an excellent choice for a US-based discount broker.