Ever wonder why every firm on the Street is pushing central asset accounts? The accounts money funds are hugely profitable.
According to IBC Financial Data Money Fund Report, money funds overall yielded an average 5.15% (seven-day compound yield) with a 0.57% expense ratio, for the week ended May 22, 1998. The 10 largest full-service brokerage money funds yielded 4.98% during the same time with a 0.72% expense ratio.
If you look at the highest performing and lowest performing money funds of the same asset size, and if you take out the third-party fees, the performance is the same, says Rick Stone, a New York City attorney at Kaufman Malchman Kirby & Squire. There is a direct relationship between payout and performance.
Stone is representing investors in a class-action claim that contends clearing firms dont adequately disclose their revenue-sharing deals with money funds.
Theres nothing wrong with a firm looking for a money fund that pays out more fees, but you must disclose that and say that these fees affect performance, he says.
Wirehouses central asset account money funds typically include 12(b)-1 fees, plus annual account fees that range from $50 to $100, and shareholder service fees ranging from 12.5 basis points to one percentage point, explains Peter Crane, managing editor of IBCs Financial Data Money Fund Report in Ashland, Mass. There also can be annual credit card fees, such as Merrills $25 fee.
These fees seem miniscule, says Stone, but when you multiply [by a large asset base], thats a lot of money for not doing much.
Merrill Lynch gets gross revenue of more than $280 million a year from its $50 billion CMA Money Fund, says Crane, which features an annual 0.56% expense ratio. The fee is about in line with industry average, but the CMA Money Fund is 50 times as large as the average money fund.
It doesnt take much to run a money fund, Stone claims. Theres little difference in what you need to do with $1 billion or $50 billion in assets. Investors should benefit from the economies of scale, he says, but wirehouses are on the boards of these funds, and they dont care.
Firms often encourage brokers to sell central asset accounts by making them a key part of asset gathering contests, as with Merrill Lynchs Masters contest. They also award asset gathering credits toward deferred compensation bonuses for opening the accounts.
Prudential Securities recently took the unusual step of giving brokers a split of Command Account fees as an incentive to sell them to clients--15% of the $100 annual account fee. Prudential has about $9 billion in Command money fund assets.
Prudential Securities brokers say the firm has made it clear clients must have Command.
Its not promoted; its jammed down our throats, beefs a Prudential broker in New York. If I have an account that pays $10,000 in commissions, the client still has to pay an annual fee for the account if he doesnt have Command. The rep calls the Command statement great, but says most of his clients dont want another debit card. I have a lot of traders; they dont want to keep money in an account.
The push to open Command accounts is telling brokers the firm only wants affluent clients, the broker believes. Theyre going to lose a lot of blue-collar accounts by forcing Command accounts.
No new financial incentives have recently been added at other wirehouses, brokers report. The firm hasnt linked FMA sales to sales contests or provided any other financial incentive in at least the past two years, says a Salomon Smith Barney broker in Colorado.
But brokers feel pressure nonetheless. They say theyre inundated with central asset account promotions that offer statistics to convince them the accounts improve account retention and asset levels.
The firm is certainly encouraging us to sell FMAs, and theyve enhanced the product so much it doesnt take a lot of encouraging, the Colorado Smith Barney broker says. The firm recently waived its fee for access to its Internet-site services for clients who have an FMA, the broker says, and waived some additional fees if clients move from an FMA to an FMA Plus.
Other brokers say theyve found their central asset account fees competitive. And with better features than banks, theyre a good buy.
I had a client the other day come in with information from banks asking me which would be the better central asset account for her business, says a Dean Witter broker in New Jersey. I found that in fees alone, a client can save on a business Triple-A [central asset account] versus what a bank offers.
The broker notes an additional benefit gained when clients write checks through a brokerage account: He can watch how the funds are used, and if money fund balances remain steady, he can talk to the client about moving into long-term investments.