SCHWAB EYES GIVING FUNDS DATA ON ADVISER TURNOVER: WOULD ASK OK BEFORE REVEALING DEAL RATES

Charles Schwab & Co. is working on a process to provide data on advisers’ trading histories to mutual fund companies.

Sources caution that Schwab’s plans could change, but the company is contemplating giving inquiring fund firms broad data on an adviser’s annual turnover ratio, a gauge of how long on average a fund position is held. (A 100% turnover ratio represents an average fund holding of a year; 200% is an average holding period of six months.)

Such information, which some advisers consider sensitive, would not be given to fund companies without an adviser’s consent.

The effort, still in the working stages, would go well beyond the information that Schwab and other mutual fund supermarkets today give fund companies on the identity and strategies of individual advisers.

San Francisco-based Schwab has amassed data on the trading frequency of advisers who buy and sell through its $72.7 billion OneSource system, which allows advisers and retail investors to trade mutual funds without paying transaction fees.

The discount brokerage giant, which enjoys a whopping 80% share of the U.S. fund supermarket business, is now mulling how to use the information and is gathering input from prominent investors and fund industry executives.

For its part, Schwab isn’t ready to talk about the project, “Nothing’s been decided,” spokesman Greg Gable says. “From our view, it would be premature to comment. At this point, we are just bouncing ideas off advisers and mutual funds.”

Today, Schwab and other prominent fund supermarkets like Fidelity Investments and Jack White & Co. will give funds information on advisers’ trading histories within that fund only — again, if an adviser permits. But no one in the industry is compiling and disseminating advisers’ broader trading habits.

At least one consulting firm, National Regulatory Services Inc. of Lakeville, Conn., has been trying to put together such a database to sell to mutual funds (InvestmentNews, May 18). But to do that it needs the raw data from Schwab, Fidelity and other custodians of adviser-controlled assets, and it’s unclear how the project might be affected by Schwab’s move to provide such data directly. A company official didn’t return a call requesting comment.

Schwab’s motivations for providing such data to fund firms might include trying to reduce adviser trading within OneSource, for which it incurs transaction-processing costs without adding revenue. Schwab is compensated mainly by fund firms, based on their assets in OneSource. Additionally, providing the turnover information might reduce Schwab’s role as a reluctant referee in disputes between funds and advisers.

gotcha, market-timers

Mutual fund executives say the data would be useful to help identify which advisers are quick-trigger traders and which are buy-and-hold investors. Funds increasingly are moving to keep out advisers they believe are prone to redeeming large positions with little warning or only shortly after they’ve bought in, but the task is complicated by the fact that advisers and individuals can invest anonymously through most of the supermarkets if they choose.

The trading problem is particularly acute for relatively illiquid portfolios, such as high-yield bonds and small-cap stocks. To meet the redemptions, they sometimes must sell securities they’d rather keep.

“We would welcome the information,” says Don Tyler, senior vice president of intermediary services for Strong Capital Management Inc. in Menomonee Falls, Wis. “An adviser on the surface may look like a very active adviser on a snapshot basis. I would hope this information could provide us with the full scope of data on an adviser’s practice.”

Strong, with more than $30 billion under management, has been one of the fund industry’s most vocal critics of market-timing advisers. In fact, it has compiled a blacklist of several dozen advisers it instructs Schwab and other custodians to keep out of its funds.

Mr. Tyler allows that Strong has at times pulled the trigger too quickly on certain advisers without having enough information on their practices. Strong within the last six months completed its own database tracking the trading habits of advisers within its own mutual funds, but that was an expensive, time-consuming process, Mr. Tyler says.

“There’s nothing better than historical trading patterns (for gauging an adviser’s potential for quick-trigger trades),” he says. “It’s not a black-and-white, question-and-answer session with an adviser that can give you the true picture.”

a misleading portrait?

Some advisers, particularly those who have pressed fund companies for lower fees similar to what they charge well-heeled institutional in.

“We invest for the long term, and we’re happy to have the fund company know (our turnover ratio),” says Milton Stern, president of Bridgewater Advisors Inc. in New York. But, he adds, “I think each adviser has to make his own decision.”

Others, however, fear that a high turnover rate can be a misleading portrait. Flexible Plan Investments Ltd., for example, employs a classic market timing strategy that makes big moves all at once into or out of stocks, bonds and other assets. But the Bloomfield Hills, Mich., firm also uses a more gradual approach that makes much less dramatic moves based on buy and sell signals.

“(Funds) tend to think of active managers as following one style or strategy, thus you can reduce their trading history to a single number,” says Jerry Wagner, president of the firm, which manages more than $300 million. “(A turnover ratio) is just too easy to misrepresent.”

Schwab should work with advisers to apply different turnover ratios to their various strategies, he says. “It’s the only way to do it fairly.”