A 10-POINT ICE PICK IN THE INVESTOR’S WALLET — BASIS INSTINCT: SCHWAB BOOSTING SHELF FEES FOR BIGGEST CUSTOMERS

Charles Schwab & Co. may be the 800-pound gorilla of mutual-fund distribution, but its campaign to hike fees for some of its oldest and biggest fund company customers is meeting with monkey-like howls of resistance.

Opposition, however, is far from universal. No one likes having to pay more, but some see the move as just good business.

Few believe any funds will drop out of Schwab’s network if the fee increase — a proposed 10 basis point hike for those now paying 0.25% — is successful because the San Francisco-based discount broker is such an important distributor of no-load funds.

“They’ve got a captive audience,” says Mark Bell, a fee-only financial planner in Chicago who uses Schwab almost exclusively. “How many funds are going to say no and walk away (because of) 10 basis points?”

At the same time, Schwab itself acknowledges that some fund groups will continue to enjoy preferential pricing because they attract such significant assets or have special relationships with the firm.

And the legion of advisers using Schwab for their mutual-fund trades are concerned that fund expenses will rise as asset managers look to pass the increased costs along to customers. Ultimately, that will hit investors as higher expense ratios push down their total returns.

“To me, it may be great to be a shareholder of Schwab, and it’s not great to have money invested or held there,” says Janet Briaud, a Bryan, Texas, financial planner with $130 million under supervision. “Schwab is out for Schwab and not the consumer.”

Schwab confirmed last week it is negotiating fee hikes for fund families paying less than the standard 35 basis points of assets for sales through OneSource, its no-transaction-fee supermarket. About a quarter of the 200 fund firms on OneSource pay 25 basis points today, either because they attract heavy asset flows or they joined the program in its infancy, says a spokesman.

The increases would affect only new assets; assets brought in at the 25-basis-point level would continue to pay the same rate.

SCHWAB’S SIDE

Schwab argues that its service level and costs have risen markedly since OneSource debuted in 1992. Co-CEO David Pottruck also told a Washington, D.C., audience last week that competitors such as Merrill Lynch & Co. charge no-load fund firms more for distribution even though they attract fewer assets.

Schwab revolutionized fund marketing six years ago when it established the supermarket concept, allowing investors to buy and sell fund shares free and charging the funds themselves for “shelf space” in the network. The concept proved to be a huge success. Mutual fund assets in OneSource are up 17% so far in 1998, to $67 billion, and Schwab’s market share in this channel is a commanding 80%.

“We are very concerned about what we’re hearing Schwab is proposing,” says Don Tyler, senior vice president of intermediary services for Menomonee Falls, Wis.-based Strong Capital Management. “We’re (still) interested in servicing those clients who want to come through Schwab. At some point in time, there’s an economic issue we have to sort out.”

Unlike some, Strong does not charge shareholders a 12(b)1 marketing fee, typically 25 basis points, which could help cushion the blow of a fee hike. It would come straight out of Strong’s management fee.

Still, the firm is much less reliant on Schwab to generate assets from intermediaries than it was, say, three years ago, when the vast majority of advisers invested in Strong through Schwab. Now, the company’s funds are in numerous 401(k) plans and broker-sponsored wrap programs, which package different funds and charge a set percentage of assets.

Others are more understanding of Schwab’s predicament. “We’ve been on the record for a long time telling (Schwab) and others in the industry that we feel 25 basis points is probably too low for the quality of distribution Schwab is delivering to us,” says Morty Schaja, chief operating officer for the $6.2 billion Baron Funds, which gets nearly half its assets through Schwab (which makes up about 4% of its holdings).

Regardless of what happens to OneSource fees, fund expense ratios will not increase, industry executives pledge.

guess who pays?

Others question that. “In the short run, (the funds) eat it,” says John Moody, who runs his own mutual-fund supermarket for Denver-based bank holding company Matrix Capital Corp. “In the long run, they find ways to pass them along.”

And fund executives worry that Schwab’s competitors will raise fees — or that Schwab will come back for more down the line.

No. 2 supermarketer Fidelity Investments raised its fee to 35 basis points in January, although larger fund firms still get a price break. Jack White & Co., the third-largest supermarket, which just agreed to be acquired by discount broker Waterhouse Securities, says it won’t hike its 25-basis-point fee.