Cost of Buy-and-Hold Funds Strategy Goes Up

Like other mutual fund companies, Fidelity preaches a buy-and-hold philosophy. But doing that in a Fidelity brokerage account soon will become a little more expensive.

In April, the Boston-based brokers will begin charging a $15 inactivity fee each quarter to investors with less than $30,000 in Fidelity brokerage accounts who have not conducted at least two transactions in the last 12 months.

This fee isn't just for investors who dabble in stocks. It also applies to long-term mutual fund investors. "We are trying to allocate the cost of servicing across our customer base," says Jessica Johnson, a Fidelity spokeswoman. The new fee is expected to affect about 6% of current customers, she adds.

As with any brokerage account fee structure, there are many exceptions. Customers who hold only Fidelity mutual funds pay just $24 annually if their account totals less than $30,000 and holdings in any one fund dip below $2,500. This fee has long been in effect, says Fidelity, and it is waived for accounts in which automatic periodic investments are made.

For accounts that include non-Fidelity funds, automatic periodic investments do not satisfy the annual two-transaction requirement. Neither does buying or selling Fidelity mutual funds and some other no-transaction-fee funds. What does count as a transaction? Trading stocks, bonds and options and buying and selling mutual funds that come with a transaction fee.

IRA accounts also will be subject to the inactivity fees, though SIMPLE IRAs and rollovers from SIMPLE IRAs and 401(k)s that originated with Fidelity will not be charged.

Despite these fees, Fidelity's separate investment management arm continues to advise investors to buy and hold. Indeed, the firm's brightest star, Peter Lynch, warns trigger-happy fund investors on Fidelity's Web site: "Don't try to time the market."

Lynch adds: "If you'd invested $1,000 in the S&P 500 in 1978, 20 years later your investment would be worth $21,750." That same strategy in a Fidelity brokerage account now would net you less because of the new fees.

Mutual fund investors looking to make a lump sum investment of less than $30,000 would do well to shop around. Of the eight other brokerages contacted for this story, none charge inactivity fees, though some have other fees. Schwab, for example, charges a $29 "low-balance fee" for accounts with less than $10,000.

Assuming you had $10,000 in nonproprietary mutual funds in an account with no activity, here's what you would pay annually just to stay with these popular brokers:

Annual Cost of Inactive $10,000 Mutual Fund Brokerage Account Fidelity* $60; or $24 if you hold only Fidelity funds and holdings in any fund dip below $2,500 Datek $0 in non-IRA accounts; $40 for IRA accounts Charles Schwab $0; or $29 if account dips below $10,000 DLJdirect $0; or $35 for IRA accounts (waived if you execute 3 trades in 12 months) Vanguard $0 Waterhouse $0 Discover $0 Quick& Reilly $0 Ameritrade $0

*As of April 1 Source: The companies

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