E-Trade to Rebate Some Mutual Fund Fees

E-Trade Group Inc. said Wednesday that it planned to start giving customers a break on some of the fees they pay on mutual funds bought through the discount brokerage.

The Menlo Park, Calif.-based company expects to start rebating half of the so-called 12b-1 marketing and “shareholder service agreement” fees that it receives from mutual fund companies to sell their funds.

The rebates, in the form of credits to investor accounts, will start by the end of this year.

Fund 12b-1 fees are deducted directly from portfolio assets, reducing shareholders’ returns. The fees have long been a source of controversy for the fund industry; critics say many investors don’t realize how much they’re paying over time.

E-Trade said its share of 12b-1 fees typically ranges from 0.25% to 0.3% of fund assets per year, but can be as high as 0.4%.

“In an environment where the stock market has been difficult, this type of differentiation is meaningful to customers,” said Lou Klobuchar, chief brokerage officer at E-Trade.

A rebate of 0.2% on a $250,000 fund portfolio would amount to $500 a year.

The brokerage appears to be attempting to steal market share from rival fund “supermarkets” offered by Charles Schwab Corp. and Fidelity Investments, analysts said.

Though Congress and securities regulators have turned their attention recently to the fairness of fees paid by fund investors and the disclosure of those charges, E-Trade said its program is unrelated to that debate.

The brokerage also released its second-quarter earnings, saying profit sank 61% from a year earlier as it took a $76-million charge to close offices and eliminate some investment products. E-Trade earned $12.7 million, or 3 cents a share, versus $32.8 million, or 9 cents, a year earlier.

It raised its forecast for all of 2003, however, citing increases in stock trading and in its mortgage business. The company said it expected to earn 22 to 27 cents a share this year.

In trading before the announcements, E-Trade shares slid 41 cents to $9.76 on the New York Stock Exchange.