Here are some things I think I am thinking about this week:
1) The Fidelity Fee Fiasco.
Twitter was in a firestorm this weekend over the announcement that Fidelity will charge a $100 commission on a bunch of the ETFs on their platform. And it’s not just a bunch of boutique ETF issuers – we’re talking about $10 billion+ of ETFs here.
I am uniquely familiar with the situation because we had to negotiate this very problem with Fidelity last year. You see, what’s happening here is that Fidelity is losing a whole bunch of revenue from the death of mutual funds where they used to pay to play. ETFs currently get shelf space at the big brokerage firms, but don’t always have to pay to play (the big wire houses still make you pay to play, but that’s a whole other matter). Fidelity wants to replace this lost revenue stream by forcing ETF issuers to give them a cut of the action. So, what Fidelity did here was tell the ETF issuers that if they wouldn’t pay to play then they’d charge customers a $100 transaction fee on those ETFs. Yikes.
This is a messy situation. On the one hand, I totally understand that Fidelity wants to charge issuers a fee to have shelf space. I don’t necessarily think it should be free for ETF issuers to be able to sell their products for free and platforms like Fidelity help ETF issuers get access to millions of buyers. Discipline Funds pays the fee at Fidelity so our shareholders won’t have to pay the commission. And I have no problem with that. I don’t love it for obvious reasons, but I understand it.
What bothers me here is that the brokerage firms are using the retail investor as a hostage to negotiate the terms they want. So there are billions of dollars tied up in these assets and if retail investors want to transact in these funds then they need to pay a high commission. I just don’t see why the retail investor should be punished for a negotiation that is between the ETF issuer and the brokerage platform. Fidelity is effectively holding small investors hostage in order to make the ETF issuer comply with their demands. It’s a bad look because Fidelity doesn’t want to deplatform the issuers because that’s a total loss and so they decided the best action was to…hurt the retail shareholder to force the issuer to act. If Fidelity had asked for my advice I would have told them to avoid this and the very bad publicity that will come from it. After all, the lost accounts and bad PR is almost certainly worth more than the revenue they’ll recoup from the $10B of assets being held hostage. There’s a rumor Schwab is going to do the same thing. Boy, if you wanted to create an environment where retail investors and advisors flock to alternative brokers then this sort of stuff is the perfect way to achieve that outcome.
What should be done here? Frankly, I think the old pay to play for shelf space model is bad. It just creates conflicts and results in less consumer choice. It’s part of why decentralization is on the rise. In a world where there are rising decentralized platforms and popular new firms like Altruist, Robinhood and M1 I don’t think the incumbents should be trying to replace antiquated revenue streams by slapping the old model onto new products. And aside from the fact that the mutual fund model is dying, it’s just a really bad look to force the small investor to pay the price for a negotiation they aren’t even involved in.
Personally, I suspect that one day the brokerages will move towards a model where it’s the advisory firms who ultimately pay to play. Think of it as a Costco model where the financial advisor operates as the personal shopper and Costco charges the advisor a membership fee to go in and choose whatever product they want. Then the advisor can operate as a fiduciary, the brokerage is a true open architecture and there are no conflicts between the products sold on the market and the broker shelving them. Advisors probably won’t love hearing me say that, but if I had to guess where this all ends up one day that’s the model that makes the most sense to me. But man, making the small investor pay the price in a negotiation they’re not even involved in? Not cool in my opinion.
2) I am Speaking at the 2026 Bogleheads conference.
I was invited to speak at this year’s Bogleheads conference. I have to say that this is one of the great honors of my life. I consider John Bogle the most influential person in my investing career. I don’t think the Bogleheads would call me one of their own, but I consider myself Boglehead adjacent. After all, my basic philosophy is diversify, keep it simple and keep your costs low. I think where I probably diverge with some Bogleheads is I make things a little more complex than they might like. But that’s largely a function of my job and being a big dork. I just encounter a lot of people with complex situations and so a neat 3 fund portfolio doesn’t work for them. I also have a unique methodology with the asset-liability matching that I believe needs a little more customization than most Bogleheads would like. Then again, I do know that many Bogleheads love bucketing strategies and so I will be very excited to present my own version of bucketing at the conference.
If you can attend I hope to see you there. The speaker line-up looks wonderful with people like Ben Carlson, Bill Bengen, Adam Grossman, Jennifer Rozelle and all the usual Bogleheads including Christine Benz, William Bernstein, Rick Ferri, Paul Merriman, Mike Piper and many others.
3) That Thing Isn’t What you Think it is.
What if you were thinking about a thing that isn’t the thing you were thinking it is? For instance, what if you had a preferred stock that had a yield of 11.5%, operated a lot like a bond fund and you were told it was a “money market fund”. That’s what Michael Saylor says STRC is. Saylor was on Twitter this week describing their preferred stock as having “~1.7% volatility, a 4.49 Sharpe, and ~$278M in daily liquidity, money market–like stability with market-leading risk-adjusted returns.” Oh boy.
First, I don’t have a view on appropriateness of this instrument. I don’t have a problem with owning preferred stocks. I like to think of them as hybrid instruments (they’re not common stocks, but they’re not quite like bonds either) so they fit my Defined Duration model as a sort of inbetweener duration instrument. I’m obviously not a big advocate of individual stock picking, but I can see how someone might want to take a little more risk and own an individual security like this assuming they understand the risks. But we should be clear – the reason this thing has a potential 11.5% yield is because it’s higher risk. It is, very much, not a money market fund.
Here’s the kicker with this narrative – Saylor uses the trailing 1 month volatility and annualizes it to quantify the volatility. You can see the disclosure on their website. But when you look at the volatility since inception it’s actually 12.97%, WAY above 1.7%. The Sharpe is 1.18. And look, these are great figures! I am not knocking the instrument. But if you bought this thing at inception 8 months ago you’ve had three drawdowns of greater than 3.5% and two drawdowns of more than 6%. That is very much not what a money market fund (MMF) does and the last 30 days of performance does not reflect the way this thing operates.
The thing is, a money market fund has no volatility specifically because it has little or no credit risk. A MMF of Tbills has no principal risk because the US government is the largest revenue generator in the world and has a printing press. They can’t go bankrupt so they expose TBill holders to no credit risk. Microstrategy does not even rank in the top 5,000 revenue generators in the world and the only thing they can print is more Microstrategy liabilities. Which is another problem here. You see, the way STRC works is it relies on trying to maintain a par peg via a countercyclical dividend policy. That is, when the stock drops below $100 the dividend increases to bring in buyers. And when the price rises over $100 the dividend does the opposite or they issue more shares to cool demand. I actually think it’s a cool process although I am highly biased by any automated countercyclical strategy! But it’s also a risky process.
The problem is, this instrument also acts as a floodgate. Typically, when a firm encounters financial trouble the dividend is one of the first things they’d cut because it’s an instant cash flow saver. You can reduce the flooding by cutting the dividend. But if MSTR runs into financial trouble and STRC begins to drop in value then the mechanism results in a dividend increase which means that this instrument itself will put more financial strain on the mother entity at a time when it can’t afford it. It can actually increase the flooding in an environment where the ship is sinking. Now, this makes it a very strange instrument and one that I cannot even comprehend in the context of a Defined Duration strategy because it’s structured to be a short-term instrument, but in a credit crunch the instrument would actually result in a procyclical snowball effect that turns it into an infinite duration instrument. In other words, this thing isn’t the thing Michael Saylor thinks it is.
Well, that’s all I’ve got for now. I hope you have a wonderful week.