DWS Investments is lowering sales charges and break points on some of its mutual funds, a move that could foreshadow industrywide price cutting to attract disillusioned investors, according to observers.
“Loads could easily go the way of the dodo,” said Ben Phillips, a partner at Darien, Conn.-based consulting firm Casey Quirk & Associates LLC. “Advisers are operating in a fee-based world, and it's just difficult to make a compelling case to a client to pay a large sales charge for any mutual fund.”
“There is a massive amount of money sitting on the sidelines. We need to create some added incentives, or at least fewer barriers to re-entry, if we're going to draw people back to the markets,” said Doug Beck, managing director and head of product management at New York-based DWS.
Starting this month, DWS will reduce the front-end loads on Class A shares on almost a dozen funds — mostly bond funds, for now — and will lower its principal pricing break point to $250,000, from $1 million.
The reduced sales charges will vary, but all of the funds will eliminate loads completely on investments of more than $250,000, ac-cording to a recent DWS filing. Previously, these funds carried sales charges that ranged from 2% to 2.6% for investments between $250,000 and $1 million, for instance.
At the same time, DWS is lowering loads on the same funds to 2.75%, from 4.5%, for investments of less than $100,000; sales charges on investments of $100,000 to $249,000 will fall to 2.5%, from 3.5%. Investors who redeem their shares in the first year, however, could face a 0.5% back-end charge.
“We could be looking at the beginning of a shift where mutual fund companies take a more tactical, strategic approach to go after individual investors,” said Cindy Zarker, director at Boston-based research firm Cerulli Associates Inc. “Firms are looking at a number of ways to draw people back into the markets, and lowering upfront sales charges will get some strong consideration.”
Although Ms. Zarker and a number of industry observers are unfamiliar with other firms that have taken the DWS route, they noted that such a price-cutting move could give a fund company access to a much broader universe of value-conscious investors.
“It would clearly remove a major hurdle for many investors,” said Jonathan Kreider, a research analyst at Lipper Inc., which is based in New York. “And the more hurdles you remove, the better it will be for investors at the end of the day, so I'd expect to see more companies head in this direction.”
Financial advisers, for their part, may be forced to take a slight haircut on their compensation by placing clients in funds with reduced loads. DWS, for instance, is lowering the upfront commissions for advisers on most large orders to 0.5%, from 0.85%, on the funds whose sales charges have been revised.
But that won't necessarily be bad for advisers, as investors increasingly ignore funds that carry high upfront loads.
“This would give us some more flexibility to actually reposition clients,” said Brian Appel, principal at Appel Financial Group of Great Neck, N.Y., an affiliate of New York-based Axa Advisors LLC.
“Losing less and saving more are their top priorities right now,” he said. “Many of my clients are so concerned about costs at the moment that if you reduce sales charges and lower break points, they'll give a fund some consideration.”
These types of moves by mutual fund companies “could simply be a reflection of a new reality,” said Loren Fox, senior research analyst at New York-based Strategic Insight Mutual Fund Research and Consulting LLC. “There are clearly fewer people with $1 million to invest in a single mutual fund, which means mutual funds companies will have to revisit their break points and fees,” he said.
As always, a mutual fund's performance will be the most important consideration for advisers, said Casey Quirk's Mr. Phillips.
“But all things being equal, the fund managers who can give investors access to the same kind of pricing and privileges once reserved for high-net-worth investors will be the ones with some real appeal to investors,” he said.
The timing may be right to capture the public's attention. In April, investors poured close to $30 billion into bond funds and $20 billion into equity and balanced funds — the largest monthly net inflows to mutual funds since February 2007, according to estimates from Strategic Insight.
E-mail Mark Bruno at [email protected].
