The price competition in the financial sector

Today Apple became the first trillion-dollar company and won the race against other MAGA companies. While the market is celebrating this event, asset management firms seem to be forced into a price competition, as Fidelity launched the first zero-cost index funds in the US on Wednesday. The share prices across the asset management industry fell today in the response to Fidelity's move.

The zero-fee funds are index funds; since they are passive funds, their management costs are relatively low, this makes zero-fee funds possible. Of course, other asset management companies can also launch zero-fee funds and maintain their current market shares. However, this will significantly lower the companies' profitability. Therefore, for the asset management industry, they have two options, either they enter the price competition and launch zero-fee funds, or they leave the passive fund market and gain their profits from the active fund market.

Whatever asset companies choose, the competition in the fund market will increase inevitably. When the companies choose to stay in the passive fund market, the competition is obvious that they have to launch zero-fee funds. If some decide to leave the passive fund market and focus on the active fund market, they have to outperform the passive fund market (which is difficult at the moment as many active funds are underperforming passive); moreover, the number of active funds will increase, more efforts are made in the active fund market. This will force active funds to perform better and lower their management fees.

To conclude, Fidelity's launch of zero-fee funds will lower the fees of all funds in the industry, including both passive funds and active funds. This is highly likely to affect the wage level in the asset management industry, as the companies are facing lower incomes from fees.