Greater Use of CCAs


New York – Declining mutual fund profitability has prompted fund managers to increase their use of client commission agreements (CCAs) to reduce commission costs, according to industry sources.  We doubt this is a temporary phenomenon, and will continue even as fund industry profitability improves.

A recent study by Management Practice Inc, a consulting boutique with expertise in fund governance topics, illustrates the pressures on mutual fund profitability.  The chart reproduced below is based on statistics from eighteen publicly traded asset managers with consistent operating structures over the past five years.  It shows assets declining to 2005 levels by Q1 of this year and rebounding to 2006 levels in Q2.  Although assets are improving, margins are not.

There are a few reasons for the margin squeeze.  The proportion of assets held in equity funds declined from 60% in 2005 to 45% in 2009, reducing management fees because equity funds charge higher fees than money or bond funds.  Distribution costs have increased as funds rely more on financial intermediaries and supermarkets.  Other factors include increasing complexity of products and higher legal and compliance costs.

According to commission management sources, funds are reducing commission fees through more aggressive use of CCAs (along with their UK/European counterparts, commission sharing arrangements or CSAs) to trade with one counterparty and direct commission payments to other firms as payment for investment research received.  Funds are negotiating ‘cost plus’ commission fees with their CCA counterparties and directing more trading through the lower-cost CCAs.  Traditionally, proprietary research (research offered by brokers) has been paid through bundled ‘full service’ commissions which tend to be in the 4-5 cent range.  ‘Cost plus’ rates are generally half that rate.

‘Cost plus’ helps funds reduce their commission fees, while at the same time it requires them to be more proactive in managing their research relationships, assigning values to research received.  It also means that brokers that traditionally have received ‘full service’ commissions are now sharing their clients’ pain, and getting their margins squeezed also.

We suspect that the trend toward lower-cost CCAs will continue even after fund asset levels begin to recover.MF profitability


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