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Friday, June 07, 2002

An All-American Fight

by: Sean Hanna, Editor in Chief

American Funds and American Express may be getting into what could be termed an "All-American" war. American Express, one of the largest franchisers of investment advisory services, is increasing the ticket charge levied on sales of American Funds to as much as $85 per trade, according to the Wall Street Journal. Typical ticket charges are $15 to $20 for an outside fund at Amex. The Minneapolis firm is making the change to make up for the relatively small revenue sharing payments it receives from American Funds, the paper reports.

"They wanted a free ride on our distribution system, and we don't give free rides," the paper quoted American Express spokesperson Marie Davis as saying.

As they say out West, "Them are fighting words."

The article also reveals that sine March 1 American Express has barred its 10,000 advisors from opening accounts directly with fund firms. Instead, they are now required to go through an American Express brokerage account to purchase a non-proprietary fund for a client. American Express made that change in policy for recordkeeping and compliance purposes. However, it also means that advisors can no longer do an end run around ticket charges.

For fund firms that do not have their own distribution network the action by American Express may signal another round of squeezing that will leave them with fewer assets in their own pockets, even if they are "hot" in the marketplace. It also reflects American Express' attempt to rebuild its fund family. Earlier this year, it pulled of a high-profile raid of Fidelity Investments to grab a team of investment managers.

American Funds is currently the most popular fund family with advisors. The paper attributes that popularity to the strong performance of the funds in the family, but advisors interviewed by MutualFundWire.com also point to the relatively low expense ratios of the funds another reason they are a good product to place with clients. There is also evidence that funds with low fees are likely to have superior long-term performance.

Of course, the low expenses in American Funds products make it difficult for the firm to pay the same revenue shares to distributors that some other fund families are able to pay. This inherent conflict is setting up a showdown between fund firms that are trying to reign in expenses to boost performance and remain shareholder (and advisor) friendly and distributors that need growing revenue shares to support their technology and marketing investments.

It is no surprise then that the first firm affected by the changing policy at American Express is American Funds. The question for other fund families to answer as they watch this struggle is which way is the power in the industry shifting. Is it flowing to the product maker or the distributor?

After a decade of shifting to the product maker, it should come as no surprise that the distributors are starting to bite back now that flows are slowing and, more importantly, asset appreciation feels to be a thing of the past. When both of flows and the markets were growing to the sky, distributors did not feel pain when opening their doors to outside funds. Now they do.

Starting in 2001 many large financial services firms that play both sides of the distribution and manufacturing game started in-depth looks at the economics underpinning their businesses. One of the first things that they consider, of course, is revenue-sharing and which funds firms cost more in lost sales than they bring in through sharing of fees.

At American Express, it appears that the firm has decided to make outside funds pay for themselves even if it means making the advisor pick up the tab. We will see if the other distributors follow. 

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