STONEWALL TO SCHWAB FEE BOOST: FUNDS FEAR PLAN JUST THE START OF SUPERMART SHELF-SPACE HIKES

Mutual fund supermarket leader Charles Schwab & Co. is running into stubborn opposition over its plan to hike distribution fees to the biggest fund groups in its $70.2 billion no-load OneSource program.

“The last thing we want to do is to opt out,” warns Don Tyler, senior vice president of intermediary services at Strong Capital Management Inc. in Menomonee Falls, Wis. “But at some point in time when things get out of balance there has to be a line drawn in the sand. What Schwab is proposing may put the relationship out of balance.”

There is even talk that fund groups — from Strong and Denver-based Janus Capital Corp. to New York-based Neuberger & Berman Management Inc. — might band together to nudge Schwab to compromise on its plan announced last month. The urgency is obvious: The funds hope to snuff any potential fee increases at other supermarkets.

Mr. Tyler says Strong has not participated in any meetings with other fund groups. “At the moment,” adds a top executive with one of the five biggest fund groups participating in OneSource, “people are working independently.”

Says another fund company executive who requests anonymity: “We are very concerned what action Schwab might take if we come together. There are also legal issues that might concern any formalized consortium.”

Schwab wants to increase the annual fee (0.25% of assets under management) that the biggest-selling funds would pay on future sales through OneSource to nearer the 0.35% that smaller fund players pay.

That 16% to 20% spike may hardly seem worth haggling over. But for a company like Chicago’s Harris Associates, a mere five basis points could add up to an extra $650,000, based on the estimated $1.3 billion (40% of net sales) its Oakmark funds derived from Schwab last year.

A Schwab spokesman denies the discount brokerage is getting any static on the fee hike: “Our sense is that funds have an appreciation for the forces at play and understand the need for a fee increase.”

To be sure, negotiations between Schwab and its biggest fund sponsors are not entirely adversarial.

“People view Schwab as an important partner in growing their businesses,” says Neal Litvack, executive vice president of retail marketing for Boston’s Nvest LP, whose affiliates include Harris Associates and Loomis Sayles Funds, also marketed through OneSource. “They’ve done an immense amount of work on our behalf. And we feel we’ve done an immense amount of work in helping them build assets.”

For the funds, the broader issue is whether swallowing Schwab’s rate hike might open the door to similar moves by other supermarkets.

“Schwab is very much a leader in this category, and they establish price points,” says a senior fund company executive. “It’s not just the assets with Schwab, it’s also the assets in other rented distribution networks that are at risk here.”

TRADING PROFITS WEAKENING

Some fund companies believe Schwab may be hiking fees to make up for a profit squeeze in its discount brokerage unit.

Last month, the San Francisco-based firm reported that first-quarter profits rose just 1.9%, due to declining trading revenue as customers switched to cheaper electronic trading. But Schwab’s fund supermarket fee revenues swelled more than 30%, to $125.4 million.

Schwab insists the fee increase reflects the expanded services and technology investments the firm has made over the last six years.

It also has said 35 basis points is now the market rate for participating in most supermarkets. But the large funds dispute this, saying they continue to pay no more than 25 basis points among all their other supermarket distribution agreements, including Fidelity Investment’s FundsNetwork.

One executive adds that the advantages of OneSource over competitors like Fidelity are starting to blur as Schwab expands its own family of mutual funds.

Another complication: Dennis Clark — Schwab’s current chief relationship manager with the fund groups — has been in his job only since last November, after longtime manager Matthew Sadler jumped to Fidelity. Several fund executives say Mr. Sadler had given them assurances that their distribution fees would not be increased.

The funds might be more willing to swallow the new prices if Schwab committed to specific marketing initiatives. One possible area of negotiation: improving fund groups’ access to Schwab’s undoubtedly rich demographic profiles of investors who buy through the supermarket.