The Fund Industry by Robert Pozen & Theresa Hamacher & Don T. Phillips

Author:Robert Pozen & Theresa Hamacher & Don T. Phillips
Language: eng
Format: epub
ISBN: 9780470949931
Publisher: Wiley
Published: 2011-01-12T16:00:00+00:00

Fees paid by the management company. There is one other source of income for intermediaries who sell mutual fund shares—fees paid by the fund management company, in the form of revenue sharing, or subtransfer agent, fees.

Revenue sharing. Revenue sharing, or marketing support, payments are made by the fund sponsor out of its own profits to compensate the intermediary for the costs of maintaining their distribution system. These payments are called revenue sharing because fund sponsors are effectively sharing part of their management fee with the intermediary. Fund complexes that would like to do a large amount of business with a particular intermediary will ordinarily enter into a revenue-sharing agreement with it. Funds must disclose these revenue-sharing arrangements in their prospectuses.

In a typical agreement, a fund sponsor will pay 25 bp on new sales and 5 bp on fund assets held by the intermediary. For a $20,000 sale, that’s $50 upfront and $10 per year. In addition, sponsors may pay fees to make a presentation or set up an exhibit booth at a conference hosted by the intermediary.

Intermediaries take steps to ensure that the payments do not influence recommendations made by their associates. Financial advisers don’t receive a payout on revenue sharing receipts. In addition, fund sponsors that haven’t signed a revenue sharing agreement are still allowed access to branch offices, and financial advisers may still recommend their funds to clients. Intermediaries must disclose these arrangements to their clients; information is usually available on their web sites.

Subtransfer agent fees. Intermediaries may also be paid for maintaining shareholder records if they combine individual accounts into a single omnibus account at the fund. Not every intermediary uses omnibus accounts, although they are becoming more common. As compensation for taking over this recordkeeping work—which otherwise would have to be done by the fund itself—the intermediary receives a subtransfer agent, or sub-TA, fee. We say more about transfer agents and omnibus accounts in Chapter 13.

Sub-TA fees may be paid by the transfer agent out of its fees, or they may be paid directly by the fund—which then usually reduces the fee it pays to the transfer agent. Since the transfer agent is often a subsidiary of the management company, sub-TA fees generally lower the management company’s revenues and profits.

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