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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?

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    This is a fantastic question, everyone should understand how their financial institutions get paid. It's good to live by the adage "if you can't figure out how your financial advisor is paid, fire them." Thankfully Fidelity offers several low cost mutual funds, so I think you're in good hands. – Powers Jun 2 '15 at 11:51
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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.

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    But with credit cards they make money off my transactions (though from merchants). Also, what do you mean by expense ration? – David Grinberg Jun 2 '15 at 0:55
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    Yes that's a good point about the CC companies, though the bank that issues your card may not make anything from the PoS fees; that might all go to the merchant account / payment gateways / MasterCard themselves. I've edited to explain the expense ratio. – briantist Jun 2 '15 at 1:00
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    The mutual funds take a percentage of everything the manage and keep it. That's the expense ratio. If they are run by Fidelity, that's how they make money. Even if you use a third party broker, a mutual fund will sometimes pay a broker for encouraging you to invest in their fund. – farnsy Jun 2 '15 at 1:03
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    In fact, one of the differences between classes of shares in a fund is often whether/how they bundle the broker's commission into the expense ratio "load". Also note that lower expense ratio directly translates to higher real returns; one of the reasons index funds do so well is that their automation means they can keep expenses down. – keshlam Jun 2 '15 at 4:06
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    @DavidGrinberg - It's very important to keep the expense ratios of your mutual funds very low. Here is a great article that quantifies how much high expense ratios decrease the future value of a portfolio: aaii.com/journal/article/… – Powers Jun 2 '15 at 11:40

protected by Chris W. Rea Nov 1 '17 at 2:51

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