To lure more customers, Fifth Third Bancorp has lowered the price of admission to its proprietary mutual funds.
The Cincinnati-based company just added level-load share pricing to its mutual fund portfolio. Among funds that collect a sales charge, most do so in a lump sum; those with level loads spread those charges over time.
"The long-term goal is assets under management," said Scott N. Degerberg, a Fifth Third vice president for trust and investment services. "We're hoping that by offering additional pricing choice, we'll garner more assets."
On April 22, $16.8 billion-asset Fifth Third added level-load versions, or so-called C shares, to its Fountain Square family of stock and bond funds. The funds previously were sold only with up-front sales commissions.
The annual expense ratio for the C shares is 75 basis points higher than for corresponding A shares, or those with front-end loads.
Once touted as a strong counterweight to no-load funds, level-load funds never really caught on with bank fund executives or investors.
But Fifth Third is giving them a try because they are easy to manufacture - they don't carry the financing expense that back-end load funds do - and they are easy for brokers to explain.
"We're trying to make our family of funds more competitive on a pricing basis with third-party funds," Mr. Degerberg said.
For the first two days the shares were available, bank brokers racked up "several hundred thousand" dollars of level-load sales, exceeding expectations, Mr. Degerberg said.
But level-load funds remain a small piece of the bank mutual fund pie. C shares accounted for only $4.6 billion of the $189.3 billion assets in bank mutual funds at yearend, according to Lipper Analytical Services, Summit, N.J.
"There seems to be limited popularity of C shares, because generally a broker wants to be compensated more now than later," said Geoffrey H. Bobroff, a consultant in East Greenwich, R.I. With C shares, brokers could wait up to four or five years to reap the same commissions they make immediately when selling A or B shares.
Fifth Third's broker compensation, however, will be the same regardless of the share classes sold, Mr. Degerberg said. The bank doesn't want to encourage or discourage sales of any particular fund class, he said.
Increased customer interest in funds with back-end loads, so-called B shares, spurred the bank to offer an alternative to up-front commissions.
"We sell B shares in targeted funds but not our own," Mr. Degerberg said. Indeed, back-end loads, which postpone sales charges until customers sell their shares, account for almost 40% of fund volume at Fifth Third's brokerage, Mr. Degerberg said. He called level-load shares "cleaner and easier to understand" than back-end shares.
Fifth Third brokers aren't alone in their enthusiasm for level-load shares.
"It's palatable for the customer and provides an annuity stream for us," said Timothy P. White, a broker who also sells C shares at Meridian Securities, Reading, Penn.
By providing steady compensation to the broker, usually from 50 to 100 basis points a year, level-load funds "really tie the broker to the customer for the long term," Mr. White said.
And since the shares don't carry an up-front charge, they help bank brokers compete with rising competition - especially financial planners who typically charge 1% of assets for their services.
Level-load shares "look, act, and taste like a retirement plan from a traditional fee-for-service financial planner," Mr. White said.
But because C shares carry higher yearly expenses, they can prove more costly to the buyer than shares paid for with a lump sum sales fee.
"We encourage our customers to buy and hold," said Kerry Alberti, executive vice president of Marine Midland Bank's broker-dealer. "So we're not an advocate of C shares, because we think they're more expensive in the long run."
And even some supporters of the level-load concept think their day may have passed, because new brokerage products, also without up-front charges, have grown more popular.
"We looked at adding C shares to our proprietary fund line, said Edward Hipp, president of Centura Securities, Rocky Mount, N.C. "But we decided it didn't make sense, because we think the single-fee wrap account probably will replace them."
