Charles Schwab is extending the holding period required for investors to avoid fees in its Mutual Fund OneSource program.
Currently, investors who shop for funds at Schwab's fund supermarket do so without incurring fees unless they hold funds for less than 90 days. But beginning November 23, investors will have to hold funds 180 days to avoid fees. Investors who withdraw earlier will face Schwab's 0.75 percent exit charge. That fee will gradually increase further beginning on February 20, 1999. Investors are charged the regardless of where the proceeds from a redemption are reinvested. Even investors who place their money in Schwab's money market funds or into other Scwab or supermarket funds, pay the fee.
Schwab says it made the change so that longer term investors do not pay more because short term investors raise costs. Schwab is not reacting to excessive short-term trading, said Greg Gable, a company spokesperson. In fact, last year, one million customers made only 36,000 short term trades, he said.
Dennis Galant, analyst at Cerulli Associates, a Boston-based consulting firm said Schwab made the change most likely because of a concern over increased trading volume in uncertain markets. Unlike investors who come to Schwab's transaction fee side and pay a price for each trade, supermarket investors may be tempted to trade more frequently. "Schwab is concerned about transaction costs, but market volatility has prompted lots of market timers to whipsaw money around," said Galant. Frequent ins and outs can increase costs and keep fund managers guessing if there will be enough cash on hand to meet market-timers' demands.
Both fund advisers and financial planners appear to welcome Schwab's move. "This is a good decision by Schwab, strongly supported by mutual fund companies," said Mitch Wurzer, National Sales Manager, investment adviser channel at American Century Funds in Kansas City. American Century, available through OneSource, already limits its fund shareholders to a maximum of six trades within a year. It also mandates that shifts amount to no more than one percent of the fund's assets, said Wurzer.
If there is a case where someone needs to get out of a mutual fund before the six month period, "it's probably either an emergency or they shouldn't have been in the mutual fund in the first place," said Holly Nicholson with Financial Planning Services in Raleigh, N.C. If they feel the market is about to plummet and they want to get their money out, the fee that Schwab imposes is not that costly and should not prohibit them from making a move, she said.
But some critics wonder if Schwab hopes to stem dollar outflows just to preserve assets. Under separately negotiated agreements, Schwab charges fund advisers a recurring fee of between .25 percent and .35 percent of fund assets that come in through Schwab's market. Some critics also wonder if the fund supermarket proprietor is reneging on its original intent to allow investors to trade mutual funds at will by creating higher hurdles. But Gable denied these were the company's motivations.
"OneSource was built with the understanding that mutual fund investors are long-term investors," Gable said.
A spokesperson for Fidelity said Fidelity's FundsNetwork is also looking at adjusting its fee structures. At Fidelity frequent trading fees are triggered when five or more short-term No Transaction Fee (NTF) fund trades (shares held less than six months) are executed within a 12-month period. E*TRADE, the online fund trading company, has no plans to change its current requirement that investors stay in a fund 90 days to avoid charges, says Brian Murray, vp and general manager of E*TRADE's mutual funds program.
Changes are also being made in Schwab's institutional fund marketplace in which financial advisers trade funds for their clients through omnibus accounts. Besides increasing holding periods to 90 days from 60, Schwab will provide special reports to fund advisers each quarter showing financial planners' "redemption ratios" over a three-year period, said Gable.
Schwab currently provides fund sponsors information monthly on each investment adviser's beginning and ending balance and monthly purchase and redemption activity. The new service, expected to begin in early 1999, will track planners' activity over a longer period of time. Schwab, however, will not provide this information without the permission of financial planners.
The new reporting will help fund sponsors distinguish between financial planners who advocate long term investing and those who do not.