Sales Fee May Become Extinct

If the current trend continues, the up-front brokerage fee on fund shares may go the way of the Dodo bird. Many clients, unhappy about management and incentive fees, see the additional front-end sales charge as a deal breaker.

Managers seek ways to reduce or eliminate the charge. Some pay brokerages separately, with little or no sales charge on the fund. The money comes from the management or incentive fees, meaning the manager in effect takes a lower fee.

Permal, the hedge fund investment arm of Legg Mason, recently eliminated a front-end sales charge on shares sold by brokerages. The charge varied but could go as high as 3%.

Another barrier to investors, in particular the mass affluent who are the target market for many new products, is the distribution services fee. This is meant to cover the higher distribution expenses of retail shares; institutional shares are usually not subject to it.

Some managers, concerned with the dampening effect of high fees on sales, have become more aggressive in negotiating sales and distribution expenses with brokerages and other intermediaries.

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