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How Do Fund “Supermarkets” Make Money on No-Load Funds?

News

Merrill Lynch & Co., the biggest brokerage house on Wall Street, is on the verge of jumping on the bandwagon of offering its customers a variety of "no-load" mutual funds managed by other fund companies, according to the WSJ on August 22.

What Is A Mutual Fund “Supermarket”?
Mutual fund “supermarkets,” the likes of Charles Schwab and Fidelity Investments, are financial services companies that “sponsor” mutual funds, i.e., they provide investors with easy access to a broad range of mutual funds. Some of these mutual funds carry a “load,” or a brokerage commission similar to you purchasing stocks. On the other hand, if you buy the so called “no load” funds, then you pay no commission to the broker.

So How Do These Supermarkets Make Money?
Fund companies so far are collecting as little as 0.25 percentage point from the fund manager for “sponsorship” privileges. That is about $2.5 for every $1,000 investment. Smith Barney Inc.'s existing service and Prudential Securities' planned one charge of 0.25 percentage point to be included in their supermarkets. Schwa's fees range from 0.25 to 0.35 percentage point.

Merrill wants to collect as much as 0.4 percentage point of all new dollars flowing into fund companies through its new program, according to the Journal.

Note. All of these funds, irrespective of the “load,” charge investors in the fund a “management fee.” Index funds tend to have the lowest management fees.