MARKET-TIMING ADVISERS FACE FEES AT JACK WHITE: FIDELITY, EVEN SCHWAB, MAY MULL PENALTY PATH

Jack White & Co. has sharply boosted the penalties for short-term trades of mutual funds in its no-transaction-fee program, and at least two other discount brokers are considering similar moves.

Last month, San Diego-based Jack White began charging advisers $50 to $100 on top of the regular $27 to $34 transaction fee the firm had been imposing for mutual-fund redemptions within 60 days. Individual investors incur the same penalties for redemptions within 90 days.

At the same time, the firm cut fees in its transaction-fee funds network to $27, or $24 for on-line trades.

pay to play

Together, the changes are aimed at forcing trigger-happy advisers out of the “free” supermarket and into the transaction-fee program, hopefully to buy and sell funds that cater explicitly to them — such as the offerings from the Rydex Series Trust, Potomac and ProFunds families.

The king of the fund supermarketers, Charles Schwab & Co., wouldn’t say whether it would follow White’s lead. But No. 2 Fidelity Investments confirms that it is considering stricter sanctions against quick moves in and out of mutual funds on its FundsNetwork supermarket, though the Boston-based giant won’t comment on details. Currently, users of Fidelity’s supermarket are subject to charges ranging from $35 to $150 on any additional transactions within a 12-month period if they have already made five redemptions in six months or less.

And Denver-based DataLynx, which in three years has amassed assets comparable to No. 3 discounter Jack White, also is mulling stronger measures to discourage market timing. Today, the online discounter offers eight free trades per quarter in its no-transaction-fee supermarket; additional moves incur a charge.

The discounters’ activity is in response to escalating complaints from no-load mutual fund companies, which have recently enlisted the fund supermarkets as allies in their battle against market-timing advisers (InvestmentNews, Nov. 17). Discount-broker executives say the Oct. 27 market plunge,
during which some funds saw heavy outflows, galvanized the fund firms on the issue.

“It’s become the No. 1 topic,” says Skip Schweiss, director of business development for DataLynx, which has about $5 billion in assets through its mutual-fund networks.

The funds’ clout is huge, since they pay the asset-based fees supporting the no-transaction-fee networks, which have revolutionized mutual-fund marketing and spotlighted fee-based advisers as a key distribution channel.

schwab on deck

But, to the chagrin of some fund firms, the supermarkets also have made it easy and cheap for market timers to buy and sell mutual funds. They have enabled “the acceleration of money,” Mr. Schweiss says. “Advisers sit at their desks, push a few keystrokes and move millions.”

White’s policy change is a recognition that charging a simple transaction fee for short-term moves isn’t enough of a deterrent, says Peter Mangan, senior vice president of White’s institutional services group. “We’ve decided we can’t absorb the costs (of excessive trading),” he says.

Still, from the perspective of fund companies, the effectiveness of White’s move — and future actions by Fidelity and DataLynx — will hinge on whether industry heavyweight Schwab follows suit. The San Francisco-based firm, which controls 80% of supermarket assets in its OneSource program, currently requires investors and advisers to pay their normal, negotiated transaction fees, capped at $39.95, for redemptions within 90 days.

“The jury’s out on how ( White’s changes) are going to come across,” says Tom Lydon, head of mutual-fund relations for the Society of Asset Allocators and Fund Timers Inc., the Lakewood, Colo.-based association for market-timing advisers.

“If there’s a change in a (fund’s) portfolio manager or a (big) change in the market, every adviser would like to have flexibility to liquidate positions,” says Mr. Lydon, a Huntington Beach, Calif., adviser. “For those few bad apples that are
trying to go in through the back door, (the stiffer penalties) will deter them. However, it will be at the expense of the rest of us in the adviser community. Unfortunately, our clients will suffer.”

Whatever Schwab does could depend on the lobbying of the increasingly vocal fund families that abhor timing because sudden redemptions can force fund managers to liquidate positions before they’re ready. This group includes Strong Capital Management, Baron Funds, Montgomery Asset Management and Neuberger & Berman.

‘Will Schwab follow?

“Philosophically, they absolutely are in sync with their fund partners,” says Don Tyler, vice president of Menomonee Falls, Wis.-based Strong’s Advisory Services unit. “Economically, both are in sync as well.”