Watch out Wall Street. Mutual fund giant Fidelity Investments is unbundling again. Fidelity, the world's largest mutual fund company, confirmed Tuesday that it will be paying Deutsche Bank ( DB) separately for its trading and research, a process known as "unbundling." Under the new deal, the fund firm will pay Deutsche Bank Securities directly for its proprietary research out of Fidelity revenue instead of combining it with trading costs. According to Fidelity spokesman John Brockelman, the goal is to lower costs for investors by allowing fund managers to pass on savings from lower trading commissions. The new plan won't trigger a drop in expense ratios for Fidelity's mutual funds, since trading costs are separate from management fees. But Brockelman says the savings on commissions will allow fund managers "to put more shareholder money to work." Brockelman says Fidelity continues to have discussions with other Wall Street firms about unbundling, but could not comment on their progress at this time. Mutual fund analysts, however, expect Fidelity's push for unbundling to set the tone for the entire industry. "They are obviously picking off as many brokers as possible," says Geoff Bobroff, a mutual fund consultant. "They are delivering the message to the Street about how they want to do business going forward." Wall Street brokerage houses have reason to be wary of Fidelity's unbundling plans, since it will further compress trading commissions. The cost of trading a share of stock has dropped dramatically on Wall Street since the advent of electronic trading. Furthermore, Wall Street research has commanded less of a premium since regulators completed a $1.4 billion settlement with 10 firms in 2003 over biased research. Mutual fund managers may pay around 5 cents a share to Wall Street firms with the cost split between trading and research -- even if they don't rely on sell-side research. Without research being tossed into the cost of the trade, some analysts say that commissions could drop to a penny a share, or even less, depending on the size of the trade.
Fidelity's latest moves follows its October announcement of a pilot program with Lehman Brothers Holdings ( LEH) to pay for trading and research on an a la carte basis. Prior to the October agreement, Fidelity paid Lehman for trade execution and research through all-encompassing commissions. "This is a great trend for fund investors because now they can see what they are paying for," says Chris Traulsen, senior analyst with fund specialist Morningstar. "It had to be a firm with Fidelity's clout to blaze this trail. And we'll see where it leads."