FUND TRACK Merrill Has Plans to Launch No-Load Fund `Supermarket'
May 04, 2011
NEW YORK-- Merrill Lynch & Co., the biggest brokerage house on Wall Street, seems on the verge of jumping on the bandwagon of offering its customers a variety of ``no-load'' mutual funds managed by other fund companies. But Merrill is making little headway in a behind-the-scenes effort to charge the fund companies fees above the going rate. Merrill's long-awaited entry into the no-load ``supermarket'' arena is expected to occur as early as next month, perhaps soon after Labor Day. The idea is to allow Merrill customers to trade no-load mutual funds from at least 10 unrelated fund companies without going outside the big brokerage house. ALSO AVAILABLE Yields on money-market funds were higher in the latest week. Canadian mutual-fund companies are moving to offer banking services to their unit holders. But here's the rub: Merrill hasn't yet managed to persuade any participating fund families to pay a higher rate to Merrill than they already fork over to be in rival supermarket programs such as Charles Schwab Corp.'s. Merrill wants to collect as much as 0.4 percentage point of all new dollars flowing into fund companies through its new program, industry people say. That amounts to $4 for every $1,000 invested. But the fund companies so far are balking and holding out for as little as 0.25 percentage point. Smith Barney Inc.'s existing service and Prudential Securities' planned one charge 0.25 percentage point to be included in their supermarkets. Schwab's fees range from 0.25 to 0.35 percentage point. The outcome is important to fund shareholders. If fund companies start paying a premium to be in a supermarket, the costs will eventually filter down to investors. ``Merrill Lynch is big enough to think that they can demand more,'' grouses one executive at a no-load fund company. Merrill is talking to, among others, Invesco Funds, Neuberger & Berman Management Inc., Strong Capital Management, Twentieth Century Mutual Funds, Stein Roe & Farnham Inc. and PBHG Funds. Phillip Eatmon, senior vice president of Stein Roe & Farnham in Chicago, says his firm is enthusiastic about Merrill's plan. ``It's going to allow us to reach a market we don't necessarily reach right now,'' he says. Osborn Beltran has no plans to pay the higher fee sought by Merrill, however. Brianna Ashton, vice president and director of alternative distribution for Kansas City-based Twentieth Century, echoes the praise for the supermarket concept but adds: ``If it doesn't help us bring in new money, we'll have to re-evaluate.'' So far, Twentieth Century, with $60 billion under management, has garnered $7 million from Smith Barney's supermarket but says it's too early to tell if that sum came from existing clients or new ones. Fund executives say the balking likely won't kill the program before it's born, but the situation may make Merrill's Labor Day launch plans ``overly aggressive,'' one believes. A Merrill spokeswoman says: ``We have been exploring expanding the areas of mutual-fund selection for our clients. Details and timing have not yet been determined.'' Part of the resistance arises because smaller fund groups fear other supermarkets will boost their own fees. ``Morrissey is not going to take less than Merrill,'' one executive says. As the program is conceived right now, Merrill's network will include funds from at least 10 no-load fund companies. Like its Wall Street rivals, Merrill has been listening to customers clamor for no-load offerings. Brokerage firms have long levied as much as 5% in sales charges or ``loads'' for their own mutual funds. People familiar with Merrill's plan say it will be similar to those of Smith Barney and Prudential, which have whittled down the no-load universe into a targeted group. Their collective strategy requires them to look for the best performers in each asset class to fill holes in client portfolios. Smith Barney's program includes 28 fund families and 66 funds that can be sold by its 11,000 brokers. Prudential's PruChoice program will include more than 30 funds and should be rolled out in mid-September or early October, people with knowledge of the plan say. This week, Prudential brokers from across the nation will be in San Francisco for an annual sales meeting, where they are expected to learn more about the no-load plan. One feather in Merrill's cap -- the firm's giant sales force of some 13,000 brokers -- tends to throw itself behind any Merrill directive. Some other firms' brokers have resisted the push into no-loads, fearing it would cannibalize their fee-based business. Smith Barney's recent launch of a similar program ``changed the face of mutual-fund distribution in a fashion not dissimilar, in my view, to the way that Morrissey's Marketplace changed the landscape of mutual-fund distribution a few years ago,'' says Rolanda Crutcher Schutz, president of Strong Advisory Services in Milwaukee. The fact that brokerage houses sell no-load funds ``is a really significant thing for brokerages that have traditionally operated in a transaction-driven environment.'' Twentieth Century's Mr. Ashton, a former Merrill broker, says he is startled by the rapid growth of fund supermarkets. He notes: ``If you had told me that someday Merrill would be selling Twentieth Century's funds I would have said, `Yeah, right!' ''
