Pershing LLC, the largest provider of back-office services and financing to small and independent broker-dealers, this month began charging shareholder servicing fees to brokers and financial advisers who buy certain mutual funds from its Fund Center platform.
The fees typically are paid by funds themselves to compensate Pershing, Charles Schwab & Co. Inc. and other providers of fund “supermarkets” for transfer agent services such as recording fund purchases and sales by individual investors, supplying prospectuses and manning service desks. But a minority of funds — including some from such popular companies as Aegis Fund Management LLC, Pacific Investment Management Co. LLC and Sequoia Fund Inc. — haven't been absorbing the servicing costs, which are deducted directly from a fund's assets.
Pershing's decision to pass along a $10-per-trade surcharge reflects continuing revenue pressures in the securities industry and presents brokers and advisers with the dilemma of whether to bill clients for the charges.
The new assessment doubles the number of fund companies on which Pershing assesses the servicing fee to 20, involving scores of funds. Pershing offers about 16,500 funds from 500 management companies.
“In the mainstream, funds pay the fees,” said Burton Greenwald, a consultant in Philadelphia who noted that the decision is made after a fund determines it is less expensive to outsource the task of maintaining separate accounts for thousands of investors. “But fees become more of an issue at a time when everybody is under pressure on expenses.”
Pershing doesn't comment on fee arrangements or contractual relations, said Michael Geller, a spokesman for the Jersey City, N.J.-based unit of The Bank of New York Mellon Corp.
But customer pricing is based on “shared economies of scale and accurately reflects the underlying costs of doing business,” he said.
Mark Tibergien, chief executive of the Pershing Advisor Solutions custody unit for registered investment advisers, was more direct regarding the fees. “One way or another, we have to get paid,” he said in an interview at the firm's annual gathering of brokers and advisers in Hollywood, Fla., this month.
The shareholder-servicing fees do not apply to funds on Pershing's no-transaction-fee FundVest platform.
Schwab isn't following Pershing for now, but “we will monitor this as it unfolds,” said Doug Hanson, a vice president of investment management services at the San Francisco-based firm.
Schwab lists about 16,000 funds on its funds marketplace, including about 1,500 on its no-transaction-fee Schwab One platform.
TD Ameritrade Holding Corp., an Omaha, Neb.-based discount-brokerage firm has about 14,600 funds on its supermarket shelf and 5,600 that avoid transaction charges. The company “would not pass along” any charges that funds refused to pay, said Sandra Motusesky, senior product manager for mutual funds and exchange traded funds. TD Ameritrade as a general policy will service funds that don't pay the fees, but certain exceptions may apply, she said.
Jenny Engle, a spokeswoman at Boston-based
Fidelity Investments, declined to comment on its policies.
For fee-based independent advisers, Pershing's decision presents some strategic dilemmas. They must decide whether to have the firm directly charge their clients for transactions, risking questions from already tetchy investors who might mistake the service charge for a commission, said Sean Hanlon, chairman and chief executive of Hanlon Investment Management Inc. The Egg Harbor Township, N.J., registered investment advisory firm has about $600 million of assets under management.
The charges also could induce advisers and brokers to avoid the funds with service charges, even if they are appropriate for clients. That could interfere with RIAs' fiduciary obligations, industry veterans said.
“It could influence which fund you're going to pick and your ability to say, "I'm agnostic about the product, and I'm doing what's best for you,'” said Rob Riley, chief financial officer of Dominick & Dominick LLC, a New York broker-dealer that also has a small RIA unit. The firm has decided to absorb the charges for its brokerage and advisory clients for now because the per-transaction charges are small.
Some advisers and brokers are hoping to persuade the recalcitrant funds to pay for the transfer agent services, saying that they can offset the cost with higher management fees that won't show up as transactional charges.
“They try to get the most they can, and we are trying to pay the least we can, though we're happy to compensate them for the work they do in the best interest of clients,” said Craig Schorr, a director at
AllianceBernstein Investments Inc. in New York.
But for a few fund companies, the issue of eroding shareholder value by paying fees isn't up for discussion.
“Vanguard does not pay for distribution on any third-party platforms. Paying to list on those platforms doesn't benefit our existing shareholders,” said Rebecca Cohen, a spokeswoman for the Malvern, Pa.-based Vanguard Group Inc.
In addition to the service fees, most fund companies pay distribution charges equal to 0.4% of new assets added annually through the fund supermarkets, Mr. Hanson said.
Some brokers, to be sure, are philosophical about Pershing's decision.
“We've always told our clients that some fund companies or clearing firms might have some small transaction charges,” said Ed Cofrancesco, president of International Assets Advisory LLC, an Orlando, Fla., RIA with a broker affiliate that clears through Pershing. “I don't necessarily like its decision, but I understand that everybody's got to make money in the capitalist system.”
Mr. Cofrancesco's firm manages about $350 million of assets, including about $100 million in its RIA.
E-mail Jed Horowitz at [email protected].
