Fidelity Investments has fired a shot across the bow to Wall Street over trading costs.
The mutual-fund giant has proposed that big securities firms stop their longstanding lucrative
practice of charging “bundled” trading commissions without breaking down what exactly the money
pays for.
Fidelity investments is calling for brokerage firms to assign a value to the trade itself, and then
quantify the value of stock research and other perks that brokers historically have thrown in as part
of the deal.
Should Fidelity’s proposal gain momentum, the ramifications for the securities industry are
potentially large.
But critics say some resistance stems from fear that, if the costs are broken down, the mutual-fund
companies may argue they’re overpaying for stock research produced by brokerage firms.
Mutual funds themselves are under pressure to cut costs to investors, amid the fund-trading
scandal.
Already, Wall Street firms are scrambling to overhaul their research products to address institutional
investor’s criticisms that much of what they’ve long produced is redundant or biased, even as they
struggle to further reduce research costs. With new prohibitions on tying investment banking
revenues to research budgets under a regulatory pact, signed by 10 big securities firms last year,
Wall Street stock-research budgets are down by about one-third since 2001.
Commission rates have been on a slow decline for years, and Wall Street wants to avoid another
drop.
SEC Chairman William Donaldson recently directed the agency’s staff to re-examine the legal
protection that investment managers enjoy to use commissions to pay for research and other items.
Fidelity estimates that 20% to 25% of commissions it pays are for investment research. Last year, it
paid $1.1 billion in commissions for its U.S. stock mutual funds, of which it estimates about $275
million went for “soft-dollar” research.
The mutual-fund giant has proposed that big securities firms stop their longstanding lucrative
practice of charging “bundled” trading commissions without breaking down what exactly the money
pays for.
Fidelity investments is calling for brokerage firms to assign a value to the trade itself, and then
quantify the value of stock research and other perks that brokers historically have thrown in as part
of the deal.
Should Fidelity’s proposal gain momentum, the ramifications for the securities industry are
potentially large.
But critics say some resistance stems from fear that, if the costs are broken down, the mutual-fund
companies may argue they’re overpaying for stock research produced by brokerage firms.
Mutual funds themselves are under pressure to cut costs to investors, amid the fund-trading
scandal.
Already, Wall Street firms are scrambling to overhaul their research products to address institutional
investor’s criticisms that much of what they’ve long produced is redundant or biased, even as they
struggle to further reduce research costs. With new prohibitions on tying investment banking
revenues to research budgets under a regulatory pact, signed by 10 big securities firms last year,
Wall Street stock-research budgets are down by about one-third since 2001.
Commission rates have been on a slow decline for years, and Wall Street wants to avoid another
drop.
SEC Chairman William Donaldson recently directed the agency’s staff to re-examine the legal
protection that investment managers enjoy to use commissions to pay for research and other items.
Fidelity estimates that 20% to 25% of commissions it pays are for investment research. Last year, it
paid $1.1 billion in commissions for its U.S. stock mutual funds, of which it estimates about $275
million went for “soft-dollar” research.
Fidelity Wants Trading Costs Broken Down: Fidelity Investments has fired
a shot across the bow to Wall Street over trading costs.
Source: Wall Street Journal, March 15, 2004
a shot across the bow to Wall Street over trading costs.
Source: Wall Street Journal, March 15, 2004
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