Charles Schwab & Co. late last month began waiving fees or reimbursing expenses on its $30.5 billion U.S. Treasury Money Fund, which is used as a sweep account by many clients for their free credit balances — but you had to be something of a detective to discover the move.
On Jan. 22, one day before Schwab disclosed the moves deep within its website, a spokeswoman said that the company hadn't followed recent moves by rival brokers and custodians such as TD Ameritrade Holding Corp. to do so.
The very next day, San Francisco-based Schwab revealed in a "frequently asked questions" section that the Treasury fund had "already voluntarily waived fees and/or reimbursed expenses in an effort to maintain certain net yields for the funds."
Companies that sponsor and/or sell money market funds that invest in U.S. government securities have been under pressure to waive fees because interest rates have plunged so low that investors are in danger of losing the principal value of their investment in the funds, which are marketed as equivalent to cash.
The issue is sensitive as fee waivers directly hit the bottom lines of fund sponsors. According to analysts at New York-based investment banking boutique Sandler O'Neill & Partners, who wrote a report on the buried fee disclosure, every 0.1 percentage points of fees waived on a Schwab fund reduces its earnings per share by 1.5 cents.
"As soon as we made the decision, it was duly noted and posted, and the questions area was a natural place to put it," said David Weiskopf, a Schwab spokesman.
SCAVENGER HUNT
To find Schwab's disclosure, it is necessary to click through six website screens, drill down into the second page of the FAQ screen for the Treasury Money Fund and find the question, "If yields for the Schwab U.S. Treasury Money Fund continue to decline, will Schwab consider waiving the OER?" OER, which isn't explained, stands for operating expense ratio.
As of Jan. 21, the Schwab Treasury fund was yielding 0.04 percentage points, according to the analysts at Sandler O'Neill, which follows financial services companies.
The Schwab website didn't elaborate on when the firm began waiving fees or reimbursing expenses. Last Thursday, executives said the amount of fees waived on the Treasury and other money funds is likely to increase as the year progresses.
"Our objective here is to keep our shareholders and the fund in a flat to net positive position," said Mr. Weiskopf, noting that the percentage of fees waived varies over time.
Indeed, the Q&A says the waivers and reimbursements are at "the sole discretion" of Schwab, which also serves as investment adviser to the Treasury fund, "and may be modified or terminated at any time."
Schwab this month issued a press release prominently displayed on its website announcing a change in the fund's charter that allows it to invest up to 20% of its assets in certain non-Treasury investments yielding higher interest.
About 5.6% of the fund's assets were invested in mortgage-backed securities from Fannie Mae of Washington, Freddie Mac of McLean, Va., and the Federal Home Loan Bank Board, the spokesman said.
It isn't just fund fees that are being pummeled by rock-bottom interest rates. Investors are borrowing far less to purchase stocks, dramatically lowering margin revenue at broker-dealers.
It isn't surprising, therefore, that publicly traded fund sponsors rarely publicize their fee-waiver moves.
"The only way to know usually is when they disclose it in earnings," said Peter Crane, president of Crane Data LLC, a Westboro, Mass., firm that tracks money-market fund developments.
Indeed, TD Ameritrade of Omaha, Neb., and Pittsburgh-based fund company Federated Investors Inc. made their disclosures in late January filings and teleconference calls related to their quarterly results.
Companies, of course, protect themselves legally by including in fund prospectuses their rights to recapture fees and expenses.
To navigate to the Q&A about the recent waivers, go to Schwab's home page at charlesschwab.com or schwab.com, and take the following journey:
Click on Cash Products; click on Investment Products; click on CDs & Money Markets; click on Money Market Funds; click on Important Announcement Regarding U.S. Treasury Money Fund (under Special Fund Updates); click on Frequently Asked Questions About the Schwab U.S. Treasury Money Fund, and scroll down to the second page.
Warning: On the CD & Money Markets screen, don't click on bars labeled "Common questions about money market funds" or "Sweep money funds and other cash features." They don't address the fee waivers.
E-mail Jed Horowitz at [email protected].
