Lehman Looks to 'Unbundle'
Its Research, Trading Fees
By ARDEN DALE
February 22, 2006 1:17 p.m.
NEW YORK -- Lehman Brothers Holdings Inc. is talking to several mutual-fund firms about striking deals to separate its research and trading fees, in arrangements that would resemble the new one it has in place with Fidelity Investments.
Research fees used to be "bundled" in with stock-trading commissions, which are paid for by shareholders in mutual funds like Fidelity's. Fidelity last year announced agreements with Deutsche Bank Securities and Lehman to separate out the fees and now will pay for research with its own cash. The unbundling deals are eroding the traditional role of Wall Street research and helping redefine how stock-trading commissions are paid.
The Boston fund giant has said it is talking to other brokerage firms about similar deals, and Lehman is in talks as well, according to a person familiar with the matter. Lehman declined to comment, but left the impression at a recent conference for chief investment officers that it is in talks.
"Based on a presentation we attended a few weeks ago, it is clear to us that Lehman has been in discussions with other asset managers about unbundling their research from execution services," said Michael Mayhew, chief executive of Integrity Research Associates, a Darien, Conn. consulting firm.
Lehman's aggressiveness in courting equity trades indicates its belief that a growing market share can compensate for rapidly falling commissions, analysts say. The firm's cash equity commissions grew 12% last year, beating competitors such as Goldman Sachs Group, Bear Stearns Cos. and Morgan Stanley.
"Since 2000, Lehman's commission revenues have grown at an average annual clip of 13%, versus 5% for the average," Banc of America Securities analyst Michael Hecht wrote in a research report Monday.
Lehman Chief Executive Richard Fuld, speaking at an investor conference in November, cast its deal with Fidelity as a move to defend market share.
Tougher Business
In general, brokerage firms will find it increasingly difficult to make money from trading stocks, as hedge funds and other big clients insist on paying lower commissions. Morgan Stanley has said its clients also are looking at unbundling and that the trend accelerated after Fidelity announced its deals.
"It's too early to tell whether the trend will grow, but if Lehman and other brokers aggressively pursue fund companies, we're likely to see those fund companies respond positively," said Jay Baris, a partner at Kramer Levin Naftalis & Frankel, a New York law firm that deals with mutual funds.
Fidelity has "continued to have discussions with other brokerage firms regarding arrangements that would be comparable to the ones we have with Deutsche and Lehman," said Fidelity spokesman John Brockelman.
Fidelity said its aim in unbundling is to cut costs for investors by allowing fund managers to pass on savings from lower trading commissions. Chief investment officers at investment advisory firms and fund firms are starting to get pressure from fund shareholders and board members to unbundle, according to a number of observers.
"Everyone is bemoaning the fact that this trend is started," Mr. Mayhew said. "They're angry at Fidelity for having started it and for Lehman for going along with it, and they're hoping that it will go away."
One reason fund companies may resist is that unbundling will cost them more, at least at the outset, as they pay for research out of their own pockets. Getting in on the ground floor may become a strategic advantage, however.
"If Fidelity says: "Here investors, we've lowered our fund costs by doing this," will that be a market advantage to them? If so, other fund firms may jump on the bandwagon," Mr. Baris said.
Wellington Next?
TheStreet.com reported in December that Boston investment firm Wellington Management Co. is looking at unbundling its trading and research costs.
Though not a household name with investors, Wellington, which manages $540 billion in assets, casts a long shadow in the fund industry. Its clients include pension funds, insurance companies, retirement plans, endowments and foundations, mutual fund sponsors, and investment advisory firms. Notably, it runs over a dozen actively managed mutual funds for The Vanguard Group, the fund giant known for its index funds.
Wellington spokeswoman Lisa Finkel wouldn't comment.
"It would certainly make sense that large firms like Wellington would consider unbundling research from execution, but I also understand they're very supportive of using commission to pay for research," said Mr. Mayhew, of the prospect of Wellington unbundling.
Sonya Morris, an analyst at Morningstar Inc., said it would be a "good thing" for Vanguard shareholders if Wellington were to unbundle.
"Since Vanguard is all about low cost and keeping shareholder-related expenses as low as possible, unbundling would definitely help to keep research dollars out of fund shareholders pockets," Ms. Morris said.
For its part, Vanguard has long taken an unbundled approach with its equity index funds, which it manages internally, paying only for trading execution. Such funds track an index and don't require stock picking by fund managers. Those funds account for $358 billion of Vanguard's $579 billion in equity funds, meaning the trading associated with nearly two-thirds of the firm's equity assets is already unbundled.
"As a result, we have saved our shareholders millions and millions of dollars over the past 20 years," said Gus Sauter, chief investment officer at Vanguard.
Vanguard declined to comment on reports about Wellington. But John Demming, a spokesman for the company, said the company has a "firm policy about obtaining value for fund commission dollars" and that its "closely oversees its advisers' activities in this regard."
Write to Arden Dale at arden.dale@dowjones.com |
