Tricks of the Trade: Scudder Loads Up

Scudder might be new to wooing brokers, but it has surely hit the ground running.

Founded in 1919, the firm has historically focused on no-load investing. But last year Scudder shifted into the broker-sold channel, slapping loads, or sales charges, on its funds. The move followed its merger with broker-sold Kemper Funds under the Zurich Financial Services umbrella in 1997.

Now the firm is using one of the oldest marketing tricks in the book for the second year in a row, according to paperwork filed last week with regulators: It is boosting brokers' commissions through April 30 on certain funds sold into individual retirement accounts, or IRAs.

This tactic, known as full dealer reallowance, is common in the first four months of the year, when investors usually stuff money into IRAs to build up their nest eggs and reduce tax bills. Just two weeks ago we noted that Oppenheimer Funds is offering a similar promotion; with fund sales well off last year's pace, others will no doubt follow suit. Few investors are aware of the practice, which critics say can tempt brokers to sell funds for their payout rather than their suitability for a given investor.

Here's how it works. When you buy shares of a fund through a broker and pay a sales charge, most of that money goes to the brokerage house and the selling broker's commission. A small portion of the money, usually between 0.25% and 0.5% of the amount invested, goes to the fund company.

But when a fund shop offers a so-called reallowance bonus, it pays its share of the load to the brokerage. The extra cash is often, though not always, shared with selling brokers.

Investors are often unaware of these promotions because they're usually disclosed only in additions to a fund's prospectus or its statement of additional information.

Through the end of April, Scudder will pay brokers an extra 0.5% for sales of Class A, B and C shares. The participating brokerages aren't listed in the filing. Scudder and Kemper made a similar offer last year, according to regulatory filings. The same dates were on the paperwork disclosing this year's offer, but a Scudder spokeswoman confirmed that was a typo.

Essentially, all of Scudder's nonmoney market or municipal bond funds are making the offer. While some Scudder funds, like the (KDHAX Quote)Scudder Dreman High Return fund, have performed well compared to their peers, through the end of last year most of Scudder's U.S. stock funds trailed their average peer over the past five years, according to Chicago research house Morningstar.

Since we can each plunk only $3,000 a year into an IRA, this might not seem like much of a bonanza for fund companies, or much of a carrot for brokers. But a closer look shows why it can be worth the effort for both parties. Fund companies are always hungry for IRA investments because they tend to stay put for years and often balloon through 401(k) rollovers as people change jobs. In fact, they can be among the most profitable accounts on fund company books.

The boosted payout can help a fund shop stand out among the crowd vying for these accounts. Because stock funds netted only some $34 billion last year, compared with $310 billion in 2000, fund marketers are probably reaching deep into their bag of tricks.

And the extra commissions can add up for brokers, too, if an investor rolls a large sum of money into an IRA. For every $50,000 worth of shares sold in an IRA, a broker can receive an extra $250. That's not bad in a dry sales year.

Scudder and Oppenheimer are hardly the only firms that offer boosted payouts. In the past we've highlighted similar offers from MFS, John Hancock Funds, PaineWebber and Pioneer.

The bottom line is that if you work with a financial adviser, it always makes sense to ask specifically how they're paid and whether they're being paid extra money to sell one fund over others.

Press Releases and Numbers

Give the folks at RS Investments full credit for both effort and creativity.

Since seven of the RS's 11 offerings are either growth or tech funds, the San Francisco shop has found itself in the crosshairs of the Nasdaq's collapse. In November we marveled at the firm's chutzpah as it highlighted the big losses on its funds' books, implying that the improbability of a capital gains distribution down the road made them worth a look. Now the firm has gone to its shareholders to make the argument for sticking with sagging growth funds and even adding more to a tech-sick portfolio.

On Monday RS put out a press release declaring "Aggressive Growth Investors Plan to Stay the Course." Here's why: "Most RS Investments shareholders (six in 10) said they plan to stay the course with their aggressive growth, small-cap and tech-sector funds over the next six months, according to a recent survey."

Since the survey consisted of 545 RS-fund shareholders, the bottom line is that the opinion of some 325 investors is the basis for this bold statement. That's 325 people who already own aggressive funds, out of some 88 million mutual fund shareholders.

Needless to say, that base of respondents doesn't seem to merit sharing, but it's hard to blame RS for trying. Most of their tech-heavy funds have lost less than their average peer over the past three years, but just two are above water over the past 12 months, according to Morningstar.

Idea for a press release: Most Online Fund Reporters Who Work at 14 Wall Street Wish Fund Companies Would Ratchet Down the Obvious Spin Doctoring.

Everybody Wants a Pinto

Maybe nothing underscores the shift in investors' psychology since the tech mania more than fund investors' shift toward tamer fare.

Three of last year's five top sellers were bond funds, according to the tally released Tuesday by Boston fund consultancy Financial Research. The top five and their 2001 net flows: (PTTAX Quote)Pimco Total Return ($8.1 billion), (AGTHX Quote)Growth Fund of America ($6.9 billion), (VBMFX Quote)Vanguard Total Bond Market Index ($4.9 billion), (VFIJX Quote)Vanguard GNMA ($4.2 billion) and (FDGFX Quote)Fidelity Dividend Growth ($3.9 billion).

Last year, all of the top five sellers were growth funds, according to FRC. The only holdover from that year is the Growth Fund of America, one of the few growth funds to beat its peers when tech was sizzling, as well as when it was fizzling.