How Are Brokers Squeezing Funds on Service Fees?
Article published on September 3, 2010
Question: What does it mean to a fund group that shareholder servicing is moving from the fund to distributors, such as broker-dealers?
- Executive, Strategic Consultancy, Boston
Answered By: Kip Meadows, CEO of Nottingham Investment Administration, which provides back office- and middle-office support to the mutual fund industry.
Answer:
What the trend of shareholder services moving to distributors means is most likely an increase in costs. Intermediaries such as large broker-dealers or banks have, in many instances, been charging ever larger fees to funds and fund groups to gain access to “fund platforms.” This will require the funds to pay asset-based fees far in excess of the shareholder servicing and transfer agent fees otherwise incurred by the fund.
The platforms justify the 25- to 40-basis-point fees by saying the fees are for “subaccounting” purposes (that is, the process of clearing mutual fund transactions, such as buying and selling securities, with an omnibus account). However, the truth is that broker-dealers have been holding securities in street name omnibus accounts for decades, without charge. (Keep in mind too that issuers of exchange-traded funds, corporate equities and municipal bonds typically don’t have to pay such fees to broker-dealers when their strategies are held in customer-level accounts.)
The fees paid to the intermediaries typically are taken from 12b-1 accruals plus supplements paid directly from the investment advisor to the fund. This often results in large 12(b)-1 accruals, or non-reducing 12(b)-1 accruals. It may also make the investment advisor less willing to reduce its fees even as assets increase, because 15 to 40 basis points of that fee are being paid out to the platforms.
The other factor is that the transfer agent’s workload is not reduced substantially, if at all, by the broker-dealer’s large role in shareholding servicing. The intermediary is not assuming any more than a small percentage of the workload. For example, trades coming through National Securities Clearing Corporation/FundSERV to an individual account or to an omnibus account are both still trades. That means the transactions require the same reconciliation and same movement of cash between the fund distributor and FundSERV.