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Rating:Schwab, Fido Split in Reaction to Selected Funds Move Not Rated 0.0 Email Routing List Email & Route  Print Print
Tuesday, May 25, 2004

Schwab, Fido Split in Reaction to Selected Funds Move

News summary by MFWire's editors

At least one fund firm is stepping ahead of the curve to eliminate 12b-1 fees. Davis Advisors' Selected Funds revealed in its most recent prospectus that it has eliminated the 25 basis point fee in a new share class and that it is now offering separate classes of shares to supermarkets and direct investors. Davis Advisors -- which has not publicized the move -- first revealed the new share class in prospectus filing with the SEC at the end of April and earlier this week in a Washington Post article.

While Davis Advisors is apparently now alone in carving out separate shares for sale to direct investors and supermarkets, the effort could be one the foretells a shake up in distribution. Until now, fund supermarkets have insisted that fund firms wishing to take part in no-transaction fee programs offer their lowest cost retail shares. Those fund firms also must pay the supermarket a 25 to 40 basis point fee on assets gathered in the program.

The new regulatory emphasis on fees and the appropriateness of revenue sharing payments may be giving fund firms new ammunition in this war. Davis Advisors is the first to take a shot across the bow of the supermarket's NTF programs.

The fund firm is splitting its funds into two share classes: Class S shares for supermarket distribution and Class D for direct-sold shares and those sold through distributors not requiring a 12b-1 fee. The nomenclature should make the intent clear to all. As a result, the D shares carry 25 basis points less in fees.

The move could cost Davis Advisors up to $2 million annually in foregone 12b-1 fees. That loss, however, does not seem to worry Davis Advisors' Chris Davis, who told the Washington Post: "It's not appropriate for us to charge people for services we don't provide."

Jim McMonagle, chair of the Selected American Funds' board, explained to the paper the rationale for the decision: "Fund supermarkets provide a very valuable service to shareholders, but if you're not getting it, why should you pay for it?"

The industry's two biggest fund supermarkets -- Charles Schwab and Fidelity Investments -- are responding differently to Davis' actions. Fidelity is letting customers decide what they want to do. Those wishing to purchase shares without a fee will find Class S shares in Fidelity's NTF FundsNetwork. Meanwhile, Fidelity customers will also be able to buy the D shares outside of the NTF program with a minimum purchase is $10,000.

Schwab, however, is refusing to sell Class S shares at all, according to Davis Advisors. That decisions means that the funds will not be available in Schwab's NTF program at all.

The prospectus states that all existing shares were converted to class S on May 1. However, the prospectus also states that holders of shares who purchased directly from the firm can convert their shares to new class D shares and avoid the 25 basis point annual distribution fee. Davis Advisors hopes to automatically switch eligible holders into D shares unless they opt out. That conversion, though, still awaits SEC approval.  

Edited by: Sean Hanna, Editor in Chief


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