Lehman Looking to Unbundled Trading Fees

Lehman Brothers may be forging a future of "unbundled" fees, through which mutual fund companies pay for research, rather than build the cost into the commissions customers pay on trades, according to The Wall Street Journal.

Last year, Fidelity announced deals with Lehman and Deutsche Bank to separate research costs from other fees and pay that cost out of pocket. Fidelity has entered similar negotiation with other brokerage houses since, according to spokesman John Brockelman.

Such deals could create a competitive edge, as reducing trading fees represents a cost savings to investors. "If Fidelity says, 'Here, investors, we've lowered our fund costs by doing this,' will that be a market advantage to them? If so, other fund companies will jump on the bandwagon," said Jay Baris, a partner at the New York law firm of Kramer Levin Naftalis & Frankel.

While officials at Lehman Brothers declined to comment on potential deals with other mutual fund companies, some say this is the tack the company will take.

"Based on a presentation we attended a few weeks ago, its is clear to us that Lehman has been in discussions with other asset managers about bundling their research from execution services," said Michael Mayhew, chief executive of Integrity Research Associates, a consulting company in Darien, Conn.

By wooing equity trades by cutting these commission costs, Lehman appears to be attempting to capture market share and make up for falling commissions. 

"Since 2000, Lehman's commission revenues have grown at an average annual clip of 13%, versus 5% for the average, Banc of America analyst Michael Hecht wrote in a recent report, according to The Wall Street Journal.

In December TheStreet.com reported that Wellington Management, in Boston, is also looking to unbundled trading and research costs.  With $540 billion in assets, the company manages money for pension funds, insurance companies, foundations, endowments and retirement plans, among others. It also manages more than 12 Vanguard Group funds.

Neither Vanguard nor Wellington would comment on their deal. But Sonya Morris, an analyst with Chicago-based Morningstar, said such an agreement would be good for Vanguard Investors. "Unbundling would definitely help to keep research dollars out of fund shareholders' pockets," Morris said.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.