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E*Trade 12b-1 Rebate Campaign, Staying Ahead of the Curve


There is something to be said for being in the right place at the right time. E*Trade Group announced an initiative to partially refund 12b-1 fees to investors using its service last summer, and the firm now has in place a rebate program pertaining to one of the hottest topics in the fund industry.

The head start has allowed the online brokerage to leap ahead of its competitors and stay in front of the SEC's recent proposal to ban directed brokerage arrangements.

The move was officially introduced in December, but E*Trade disclosed its intent to rebate part of the fees to investors in July, well before the scandal in the fund industry broke.

Specifically, E*Trade said it plans to rebate 50% of the 12b-1 and shareholder service agreement fees to shareholders that it collects from mutual fund companies for distributing and servicing their respective funds. In July, the brokerage said the move was an attempt to both boost the number of clients trading mutual funds on its service, as well as ramp up the average asset size of existing mutual fund accounts, while helping investors increase their overall earnings.

Beginning in June 2004, E*Trade mutual fund investors will receive cash rebates twice a year.

On the heels of the SEC's latest decision to increase disclosure transparency, deciding whether to try and stay ahead of the changes is a challenging consideration for companies.

The Commission is also pondering whether 12b-1 fees should be used as a substitute for a sales load, which has become common. And it has other issues too, including the overall need of 12b-1s. "The Commission is seeking comment on whether rule 12b-1 continues to serve the purpose for which it was intended, and whether it should be repealed," the Commission said in a statement.

The Campaign

Exposure for the rebate program will come in the form of a multi-pronged advertising campaign that has already begun. While the print and online parts of the approximately $10 million campaign have hit their mediums, spokesperson Pam Erickson said the target date for broadcast ads will be the end of this month.

A full-page ad in The New York Times that ran Jan. 29, 2004, had a simple but clear message. In the full-pager, a green-arrow near the top points to the phrase: "Every year, billions of dollars in 12b-1 mutual fund fees change hands." Eyes are then drawn to a phrase about four inches down, where a blue arrow points to the words that provide the punch line: "Two of those hands should be yours."

The ad claims, and E*Trade has confirmed, that the rebate money will be automatically credited to investors' accounts.

"By putting money back in the pockets of investors, our rebate program gives an opportunity to the 53.3 million American households that own mutual funds to maximize each dollar they invest," said E*Trade President and CFO Jarret Lilien, of the campaign.

As a low-cost alternative in the fund industry, E*Trade is hoping to gain even more clients by being the first to offer this rebate through a widespread advertising campaign. "What we try to do is bring innovative products to the marketplace in ways other companies can't," Erickson said. "We're proud of it."

Strategically, even if E*Trade's move does not result in similar decisions by competitors, the company may succeed in doing something else - prying those customers away from other firms.

But Burton Greenwald, an industry guru and president of B.J. Greenwald & Associates, thinks that the campaign will probably not attract many new, high-net-worth investors. "I think a substantial investor is more concerned with overall results than he or she is with saving a few bucks," Greenwald said in an interview.

For an industry seriously trying to mend its reputation, an optimistic view would be that it might be the beginning of a trend. "If it benefits customers, and customers are receptive, we would hope that other companies follow through," Erickson said.

Greenwald, however, said it is unlikely that other discount brokers will immediately start lowering 12b-1 fees like E*Trade. "I don't think there's going to be a mad rush to do it," Greenwald said. "A discount broker who has a substantial no-load fund business would be giving away a significant part of their revenue stream." Specifically, he added, "It is inconceivable that Schwab or Fidelity would follow that [lead] on their no-commission platforms."

While mentioning the intrigue created by the move, Greenwald said it is tough to gauge what is going to happen.

E*Trade's campaign overall, while not likely to gain those "substantial" investors, "was a reasonable marketing strategy to heighten brand awareness," according to Greenwald.

As far as the future of 12b-1 fees, Greenwald said he is sure about only one thing - that there will almost definitely be some changes. "The genie is out of the bottle on 12b-1 fees," Greenwald said. "Will there be more disclosure on 12b-1 fees? I don't think there's any question about that."

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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