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Friday, February 14, 2003

Look Who Is Not Talking

Reported by Sean Hanna, Editor in Chief

What if a tree fell in the forest, everyone heard it and no one talked? That is the on-the-record reaction to the five basis point fee hike Charles Schwab is now in the process of implementing. The custodian has been making the rounds with fund firms for a month explaining the fee increase and how it has improved its services to the funds in the no-transaction-fee OneSource program.

Schwab is telling fund firms interviewed by MFWire.com that it will levy a 40 basis point fee for those funds on OneSource NTF, up from the 35 basis points it has charged for roughly the past years. The hike in 1998 led some firms, including Janus, to resist the hike (word at the time was that Janus managed to keep its fee at 30 basis points that time).

This time, though, we are not hearing of any resisters. Nor are firms willing to talk about Schwab's decision on the record. "We have to pay the fee as long as Schwab delivers the assets," shrugged one fund executive the MFWire.com spoke to.

The speculation is that Schwab was forced into the fee hike in an attempt to beef up its bottom line. Just today, the San Francisco-firm said that analyst's expectations for its forward earnings may be too optimistic. Schwab itself is telling firms that the fee hike reflects an increase in the level of service that it provides funds.

Meanwhile, Schwab's action is causing some concern that other fund supermarkets, namely TD Waterhouse and Fidelity, may follow suit with fee hikes of their own. Spokespeople for both firms say that there are no plans for any such action.

At least one Schwab competitor may even see the fee hike as an opening. Jim Wangsness, senior vice president of Ameritrade Advisor Services, said his firm's entire strategy is to over value to small advisors and fund firms that stands in relief to firm trying to "squeeze the last drop of juice from the lemon."

"We have been in the business for effectively two years," he Wangsness explained. "Our business is less about slotting fees and more about trying to do the right thing for the client." He also pointed out that Ameritrade's NTF program is just one component of its value offering (Ameritrade's mutual fund trade fee is $17.99).

"We have had an increase in the number of funds wanting to deal with us in the past two months. This is less of a reaction to what some of the other custodians are doing than how fast we are growing," he elaborated. "The amount of money that can be made from a 5 basis point charge is so minimal when we are adding 10 advisors a week."

Even Wangsness, though, became quiet when fees were mentioned. "We don't discuss that," he said when asked what the current revenue sharing fee is at Ameritrade for funds. He did reluctantly add that the fee is "substantially" less than at Schwab. Perhaps someone can let us know what it is, we'll keep it just between friends.  

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