Just How Profitable Are Your I-Shares?
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Thursday, October 04, 2012

Just How Profitable Are Your I-Shares?

The conversion of mutual fund accounts to omnibus accounts is changing the way intermediary fees are being paid, as well as the flows of assets into the different mutual fund share classes, according to a study released by consulting firm Barrington Partners.

In particular, more assets are now flowing into institutional class shares, and this can lead to profitability problems for the firms sponsoring these funds.

The report, titled Intermediary Fee Survey 2012: Summary Report, says more assets are flowing into I-shares because distributors and supermarkets are expressly requiring access to the lowest cost class for their clients. However, at the same time, intermediaries are pushing to be paid more for their servicing work. According to the report, the average fees within a 12b-1 structure for all channels was 34 basis points, while that for structures with no 12b-1's, 32 basis points. The average for HCP structures was 45.3 basis points.

The problem, says Barrington managing director Hubbard Garber, is that most I-share classes weren't structured to pay 35 basis points or more in fees to intermediaries.

"There are repercussions to this trend that fund companies and their boards will have to wrestle with. It is becoming a profitability issue," he says. "You have to make sure that the class is designed to support these fees."

Garber's firm is increasingly working with fund firms to help them analyze their various share classes, how they handle intermediary fees and whether they need to be re-structured.

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