How much do fund companies pay to be on fund supermarket platforms?

Paul

Hey guys,

This is something I've been curious about but I don't have a complete answer. I know that no-transaction fee (NTF) funds tends to pay something around 45 basis points to a fund complex. How does one determine how much of the expense ratio goes to the fund complex for NTF vs transaction fee funds (TF)? From what I gather, it looks like it's the "other expenses" and 12b1 fee combined.

Here is a look at Akre Focus:

quote.morningstar.com/fund-filing/Summary-Prospectus/2013/11/30/t.aspx?t=AKREX&ft=497K&d=3b2688e09d88beada01c290e032ea208

Fees and Expenses of the Fund

The retail share has .25% for 12b1 and Other Expenses (which includes shareholder servicing fee of 0.10%) of .21% for total of .46% which is right in line for what i hear about the fund supermarket cut of the expenses.

Does the supermarket get the full .46% or maybe the 12b1 fee and the "shareholder servicing fee" of .10%?

The Institutional share class doesn't have the .25% 12b1 fee. Does that mean they fund supermarket just gets the "other expenses?"

Now, if we look at Fidelity's supermarket, why do some funds get charged a $75 transaction fee (vanguard, dodge and cox- any others?) and pretty much anything else get charged $50? I'm assuming there is some revenue sharing with the lower $50 TF funds but not quite the 45 basis points or so of the NTF funds. Any idea how much of the expense go for these other funds? Thanks as always!

ibartman

I thought that all of the 12b1 fee was paid to the supermarket platform provider, but hope that you get a reply from someone with some real knowledge about the topic.

Charles

AKREX has ALWAYS been too expensive...

c'est dommage.

VintageFreak

Honestly I don't care. Everyone pays the 12b-1 fee. Might as well own at brokerage. In fact if fund charges 12b-1 fee AND makes be buy directly I would have a problem.

PS. Please don't be hasty telling me I'm doing that for any of my funds. I will sell that fund immediately, but I may not like you...

msf

Fees are a mess. At the 10,000 foot altitude, it really doesn't matter whether there are line items (shareholder servicing fees, 12b-1 fees, management fees) or not. The bottom line is that you, the shareholder, are shouldering the expenses of the fund.

For example, Twentieth Century (now American Century) funds started out decades ago charging a flat 1% fee for management. See, e.g. TWCGX. The only line item for the no-load classes was and is the management fee. No 12b-1 fee, no other expenses.

Management in turn paid (and still pays) all the fund expenses. Something you're not used to seeing is that different fund classes have different management fees. Usually, management takes its cut - the same for all share classes - and the fund pays the expenses itself. Higher expenses for investor shares, lower for institutional shares. But with these funds, since management is responsible for the fund fees, management charges the fund more if it has to pay out more in expenses.

The point is that whether there are line items or not, you are the one paying the fund expenses. Everything else is a shell game. So it doesn't really matter whether there's a 12b-1 line item, whether there's a shareholder expense line item, etc.

You'll never know exactly what the fund pays to the broker, because those fees are negotiated separately for each fund/family. What you can do is look at what Schwab has written about its fees:

Mutual Fund Compensation section (pp. 6 - 9) in ERISA 408(b)(2) Fee Disclosure, Schwab 2015.

Some highlights:

- NTF funds typically pay 0.40% to Schwab (fees generally range 0.30% to 0.50%, though they can go as high as 1.10%). [Note: Schwab raised its fee in 2003 from 0.35% to 0.40%.]
- NTF funds typically pay onetime fee of $10K (first fund) or $1K (subsequent fund) for shelf space, i.e. to be on the platform. [Schwab denies that this is a "shelf space" fee, arguing that funds aren't paying for featured placement - see its SEC comments in 2007.]

- TF funds typically pay $20/account annually to Schwab (could go as high as $30); they have the option of paying 0.25% annually instead.
- TF funds typically pay $20K (first fund) or $2K (subsequent fund) for shelf space.

- Load funds pay Schwab shareholder servicing fees (out of their 12b-1 fees).
- Load funds may pay Schwab $6/account/year.

And all fees are negotiable.


To give a sense of how negotiable fees are, here's the MFWire report in 2011 announcing T.Rowe Price's agreeing to sell on Schwab's OneSource (NTF) platform. Key points:

- It appears T. Rowe Price is paying less than the standard 40 basis points (companies would not disclose agreed upon fee)
- T. Rowe Price is (was?) paying TD Ameritrade 10 basis points to be on its platform

I'll add that the TRP funds that are offered NTF are "Advisor Class" shares, and carry a 0.25% 12b-1 fee that likely few here have seen. (I have - that's a story for another day.)

JohnChisum

@msf, I was a investor with Twentieth Century back then. TWCGX is one of their original funds along with Select, Ultra and International. Some of those funds either consolidated or went away. Vista is no longer around. $25 a month would get one into their funds. Now they are much bigger of course.

This is an interesting discussion and one I used to have during my working years with fellow coworkers. Our 403b was filled with high fee funds but the reps from the insurance company said there were no fees attached. I believed that somehow those funds still got their money in the end. Nothing is free.

bee

msf said:

I'll add that the TRP funds that are offered NTF are "Advisor Class" shares, and carry a 0.25% 12b-1 fee that likely few here have seen. (I have - that's a story for another day.)

Agree...mentioned here a bit:
mutualfundobserver.com/discuss/discussion/comment/46610/#Comment_46610

rjb112

with high fee funds but the reps from the insurance company said there were no fees attached. I believed that somehow those funds still got their money in the end. Nothing is free.

When you say "high fee funds", is that high expense ratio fund, or they came with loads?
What type of fees? Some load funds have the load waived in a 403b plan, depending on the specific 403b plan.

I don't see any way for a high expense ratio fund to not deduct the full expense ratio for all investors in that same share class, whether the investors are in a 403b fund or taxable accounts. The specific share class invested in would be the key. Not sure I would believe the reps from the insurance company.

But I thought Twentieth Century was just a no load family.

JohnChisum

I should clarify that the Twentieth Century comment was a bit off topic. Yes, they are a no load fund company. I was reminiscing a bit from my early investing years.

In our 403b through an insurance company we had a list of funds to pick from. These were all load funds varying from about 2.5 to over 5%. We could look them up as they were common names like Lord Abbett and Franklin for example.

It was hard for me to believe that a fund with a 5% load would be "free" via the insurance company that managed the 403b. So like you, I didn't believe what the reps stated. Also their scheme was to get one into as many funds as possible. I'm sure there was a commission involved. A lot of these funds were duplicative but per the rep this was to diversify your holdings which sounded good. Most employees had no idea what was going on. That was the hand we were dealt so we had to make the best of it. I know this is a common story in the 401k/403b universe.

msf

rjb112 said:

When you say "high fee funds", is that high expense ratio fund, or they came with loads?
What type of fees? Some load funds have the load waived in a 403b plan, depending on the specific 403b plan.

I don't see any way for a high expense ratio fund to not deduct the full expense ratio for all investors in that same share class, whether the investors are in a 403b fund or taxable accounts. The specific share class invested in would be the key. Not sure I would believe the reps from the insurance company.

But I thought Twentieth Century was just a no load family.

Tax sheltered plans (401(k)s, 403(b)s) can be structured as annuities, which have wrapper fees. It common practice for these annuities to reduce their wrapper fees to the extent that they get kickbacks (um, 12b-1 or other servicing fees) from the underlying funds.

For example, if a 403(b) had a 0.75% wrapper (insurance) fee, and you invested in a fund with a 1.25% fee (including a 0.25% 12b-1 fee that got paid to the insurance company), your total fee would be 1.25% + 0.75% - 0.25%.

You'd get credit for that 12b-1 payment by the insurer issuing the 403(b) annuity.

Technically, you're still paying the full 1.25% ER; pragmatically, you're not paying full freight.

As to Twentieth Century being no load - that's not entirely accurate. While the company was still Twentieth Century, it began offering "special classes of its no-load funds that brokers can sell with higher fees attached." (Quote is from the 1996 linked article.)

More specifically, it offered retail, institutional, services, and advisor share classes. Here's the 1996 prospectus for Growth, Ultra, and Vista. (The company name change occurred in 1997.) (It's a 1MB file.)

If you do a search for "Advisor Class Prospectus", and then scroll down a couple of pages, you'll find the fees for this share class. They charged 0.50% 12b-1 fees.

Current rules (and I don't think these ever changed) are that funds that charge 12b-1 fees in excess of 0.25% cannot call themselves no load funds. (Scroll to "A Word About No-Load Funds in link.)

Thus, this share class of Twentieth Century funds appears to have been a load class.

mrdarcey

Paul said:

How does one determine how much of the expense ratio goes to the fund complex for NTF vs transaction fee funds (TF)? From what I gather, it looks like it's the "other expenses" and 12b1 fee combined.

The fund's SAI should list the exact amount paid to its distributor to pay to brokerage platforms for carrying the fund. You might have to do some math, but you can probably figure out an approximation of how much of the ER went to outside platforms.

Paul said:

Does the supermarket get the full .46% or maybe the 12b1 fee and the "shareholder servicing fee" of .10%?

Shareholder servicing is a sort of administrative fee that funds pay to have people answer questions about the fund or to produce marketing materials. It isn't a supermarket expense. It can come from the 12b-1 or elsewhere.

Paul said:

The Institutional share class doesn't have the .25% 12b1 fee. Does that mean they fund supermarket just gets the "other expenses?"

Now, if we look at Fidelity's supermarket, why do some funds get charged a $75 transaction fee (vanguard, dodge and cox- any others?) and pretty much anything else get charged $50? I'm assuming there is some revenue sharing with the lower $50 TF funds but not quite the 45 basis points or so of the NTF funds. Any idea how much of the expense go for these other funds? Thanks as always!

My understanding is that there are varying levels of cooperation between fund houses and broker-dealers. Companies like D&C, Vanguard, Primecap, Tweedy, and Mairs and Power don't really play along with the discount brokerages. They provide their own distribution, which supposedly aids in their independence and, in some cases, lowers ERs. It also means brokerages can charge more to make up lost revenue.

heezsafe

@msf Thanks for your excellent commentary and for taking the time to do it.

The first and only time this came to my attention was shortly after the financial crisis. Schwab increased their fees, apparently for the distinct privilege of placing a MF companies' funds on their platform, and about half-dozen fund companies were incensed enough to take the matter public and announced why they were planning to yank all their funds from Schwab. Some did, and set up hotlines for investors who would want to tranfer their fund shares outta there. Then the matter died quietly and I never heard any more about it.

so, I guess your answer to Paul is: "You'll never know exactly what the fund pays to the broker, because those fees are negotiated separately for each fund/family." That's probably close to the mark. Still, ya gotta wonder if some of this isn't disclosed in SAI fine print somewhere and escaping our attention?

But maybe some of these fees are creeping into a little bit of a skim from us and not being disclosed. Maybe that's what these recent SEC investigations are really about:

http://www.mfwire.com/article.asp?template=article&wireid=2&storyID=49595&bhcp=1

http://www.reuters.com/article/2014/09/04/us-usa-funds-sec-idUSKBN0GZ2HL20140904

rjb112

@msf: thanks for all the research you did for your post.
Some very thoughtful information in this thread by a lot of intelligent posters.

JohnChisum

"As to Twentieth Century being no load - that's not entirely accurate. While the company was still Twentieth Century, it began offering "special classes of its no-load funds that brokers can sell with higher fees attached."

This is correct and a lot of changes occurred after James Stowers retired and his son took over. Even a retail investor has to check the fee structures on a fund before investing. Fidelity is similar in this respect with both load and no load funds under management.

JohnChisum

Back to the reps selling funds, one of my pet peeves was the practice of selling multiple fund of fund selections. Example; an employee would go through a questionnaire and determine they could handle a moderate asset allocation based on risk tolerance and such. With the fund of fund choices ranging from ultra conservative to very aggressive one could assume that the moderate fund could satisfy the need. The rep would instead divvy up the pay deductions across the entire range of funds. A little in aggressive, some in moderate and so forth. The end result was a moderate allocation. My impression was the end result was a bigger commission for the rep. The duplication on these funds was obvious. If someone questioned the reps, they would be given a toll free number to call and speak with a specialist who would set them straight.

The sharks run fast in the retirement funding industry. Their prey is the worker with no knowledge of the subject of investing and there are plenty of them sadly.

rjb112

JohnChisum said:

The sharks run fast in the retirement funding industry. Their prey is the worker with no knowledge of the subject of investing and there are plenty of them sadly.

Yeah, and how can you blame the worker? Investing is not taught in the schools as part of the required courses. One job I was on had a 401k plan administered by Fidelity. The employees were given choices of something like 75 actively managed funds, without information about each one other than what category it was in. From lots of different fund families, not just Fidelity.

Employee friends of mine would come up to me asking me which fund or funds to invest in, because they knew I had an interest and was studying mutual funds. As if I could advise them which actively managed funds they should invest in!

Way too many choices, no guidance, not a good situation.

Perhaps people with no clue should be directed to a target date fund based on when they plan to retire?

Human Resources should sponsor employee seminars regarding how to invest in their 401k plan.

Keep it simple. Some basic index funds covering different asset classes is a good idea. Don't overwhelm with tons of fund choices.

JohnChisum

I don't blame the workers at all. Why our education system does not include financial subjects is beyond me. I'm dating myself here but in grade school we were taught how to properly count change from a cigar box. Nowadays the cash register tells the person how much change to give, if that transaction is cash which itself is becoming less and less.

Parents should be teaching their children about finances too and that is lacking in most households.

Yep, too many choices with no guidance is not a good environment. I was also approached for advice as others knew my interests as well. What I saw the most was people chasing returns as they signed up for funds that did well the previous year. Another recipe for failure.

Target date funds are the best in those situations.

Paul

Hey guys, sorry for the delayed response. I've been out of town. Thanks again (especially to msf and mrdarcey for the great answers! I just have a theory that the funds that don't participate (TF) will do a better over time than the funds that do participate (NTF) as far as performance goes. Yes, lower fees is part of it but I also think there is a higher level of shareholder care with the TF guys. I found it interest that many funds, like Primecap/Mairs and Power are $50 at Fidelity vs Dodge and Cox/Vanguard at $75. I looked at the "other expense" for both and assumed that Prime and Mairs may share more of the expense and, as a result, the client doesn't have to the $75.

ibartman

FT: Pimco, WisdomTree join Schwab’s ETF platform
By Jackie Noblett Sep 23, 2014

Quote from Jackie Noblett's FT article:

Schwab charges ETF sponsors a fixed yearly fee of up to $250,000 to participate in the OneSource platform ...

Sponsors also pay an asset-based fee based ...once it has been added to the platform. Those fees can range up to 0.15 per cent annually.

Here is link to search for complete article:
https://www.google.com/#q="Pimco,+WisdomTree+join+Schwab’s+ETF+platform"