First Union Corp. has gotten final approval to start charging sales loads on the Evergreen mutual fund family it acquired in the summer.
The change, which takes effect early next year, paves the way for First Union's brokers to sell the Evergreen family, which comprises just under half of the Charlotte, N.C.-based company's proprietary fund assets.
"We're totally excited about it," said William M. Ennis, who heads the unit that oversees First Union's proprietary fund business.
"We really think you've seen the genesis of something that's going to be extraordinary here in the fund industry," he added.
Since their inception, the Evergreen funds, which have $3.1 billion of assets, have thrived by avoiding the sales charges that most mutual fund managers use as an incentive for brokers to sell their funds.
Instead, Lieber & Co., the money management firm that started the Evergreen funds, marketed them through newspaper ads that invited investors to call a toll-free telephone line.
But ever since First Union acquired Lieber in July, experts have expected the Evergreen funds to get sales loads - because the proprietary family the bank started on its own, the First Union Funds, has them.
The bank was expected to give both families the same sales loads so that its sales force would have equal incentive to sell either family. These specialists collect a portion of the sales loads on mutual funds they sell.
And that is exactly what will happen on Jan. 2, when the Evergreen funds will be converted to a sales-load pricing structure that mirrors that for the First Union fund family, according to a measure approved by a shareholder proxy vote last week.
Under this pricing structure, customers will be able to choose from among three different sales loads - up-front fees of 4.75% on initial investments; withdrawal fees that decline from 5% to 1% over a period of seven years; and ongoing fees of 1% of invested assets.
But in a significant move, First Union will exempt anyone who buys the Evergreen Funds before Jan. 2 from the sales charges for as long as they own the funds.
By adding sales loads to the Evergreen family, the North Carolina company is leaving the small club of banks that sell no- load mutual funds.
According to researcher Lipper Analytical Services Inc., Summit, N.J., only 20 of the 118 banks running their own mutual fund families as of September had no-load fund families.
First Union is also abandoning a type of mutual fund that appears to have become more popular this year. According to the Investment Company Institute, 40.7% of mutual fund sales this year have been made by direct marketing firms, which normally sell no- load funds.
Over the previous 10 years, fund sales by direct marketers ranged from 23% to 36% of total mutual fund sales.
But Kenneth R. Hoffman, president of the Milford, Conn., consulting firm Optima Group Inc., said he thought First Union's move was wise. In his estimation, no-load mutual funds are not well-suited for banks.
Banks normally must have brokers coddle their clients, who typically are not sophisticated investors, he said.
As a result, many of the banks that sell no-load mutual funds have had to spend a fortune to pay the brokers. The extra sales generated by avoiding sales loads hasn't been enough to justify the outlays, he added.
