Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-06-18
2002-10-22
Millin, Vincent (Department: 3624)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S035000, C705S042000
Reexamination Certificate
active
06470325
ABSTRACT:
TECHNICAL FIELD
The invention is directed to a method for managing a mutual fund discount brokerage and. accompanying data processing system, wherein: subscribers subscribe to a fixed cost brokerage service contract for a time period determined by the subscriber; subscribers receive a rebate of broker service fees paid periodically by the mutual fund to the brokerage; and in a preferred embodiment subscribers receive unlimited internet access including access to a brokerage site wherein purchaser mutual fund portfolio data can be accessed and buy/sell trading orders can be implemented.
BACKGROUND OF THE ART
Mutual fund units and shares are purchased through a broker or directly from the mutual fund. The mutual fund and purchaser decide for themselves whether they wish to deal through brokers or deal directly without a broker. In this description, the term “portions” will be used to refer to all shares or units in a mutual fund, as those terms are defined by established practice with. For the purposes of the invention, whether a mutual fund is structured to distribute shares or units is irrelevant since the method is applied to each type of holding in the same way.
One means of providing brokers with compensation involves a mutual fund selling scheme known as “front end loaded” where the broker is given a commission based on a percentage of the total price of portions purchased. For example, if a purchaser wishes to purchase 100 portions of $10 value each, the up-front purchase price paid is $1050 of which $1000 is invested in the mutual fund and $50 commission or 5% service fee goes to the broker.
Another compensation scheme is known as “back end loaded” or “deferred sales charge”. Deferred sales operate in a manner which effectively hides the compensation to the mutual fund broker from the purchaser. Following the same example, the up-front price paid by the purchaser for the same purchase (100 portions at $10 each) is $1000. However, the broker is paid a service fee of $50 or 5% immediately by the mutual fund. To pay the broker, the mutual fund must borrow the $50 and mutual funds initially operate at a deficit for this reason until they become well established. Of course there are various provisions to penalize purchasers if they wish to sell their portions before a period after the initial sale to recoup the broker service fee, mutual fund management expenses and discourage migration of capital. For example, a penalty of 6% may be charged for sales of mutual fund portions in the first year after purchase, 5% the second year, 4% the third year and so on. The purchaser does not readily perceive the cost of the broker service fees but due to the severely reduced liquidity of their mutual fund investment and monetary penalties, this cost is incurred never-the-less.
So-called discount brokers operate on the basis of no commission or “no load”. Such brokers are compensated for their efforts by the mutual fund with “trailer fees”.
In the management of a mutual fund, the managers incur fixed and variable expenses which are charged to the holders of mutual fund portions on a pro rata basis. The “management expense ratio” (MER) is set by the mutual fund and in theory is calculated by dividing total mutual fund management expenses by the total amount of funds managed. In practice, a mutual fund sets the MER arbitrarily, the MER is approved by the mutual fund unit or share holders and usually the MER does not change over time. The MER is published and is included in a prospectus given to prospective purchasers.
The trailer fees are a portion of the MER and are trailer fees are paid regularly to the selling brokers for as long as the holders of mutual fund portions retain their shares or units as the case may be. For example, if the MER is 3%, management expenses of $3 are charged for each $100 of portions resulting in a value to the holder of portion of $97. Hopefully the management of the mutual fund has increased the value of the portions a sufficient amount over the originally invested $100 to more than cover this expense to the portion holders. Of the %3 MER, the trailer fees paid to brokers may account for %1 and the remaining %2 is retained by the mutual fund management for payment of salaries, bonuses, rental of office space and other such expenses.
Trailer fees are paid monthly or quarterly to brokers for as long as the mutual fund portions remain in the hands of the purchaser who dealt through that broker. In theory, the trailer fees compensate the broker for their continued advice and counsel to the purchaser while the purchaser holds the mutual fund portions. However, a conflict of interest between the interest of the portion holder and the broker is obvious. The likelihood of obtaining independent advice from the broker is somewhat suspect since the broker has a direct interest in directing clients towards the mutual funds that provide the highest trailer fees, and the broker has a strong incentive to advise clients to retain shares or units rather than to sell and reinvest.
In practice, many times the purchaser does not consult the broker except when a sale or purchase of portions is desired. The broker serves mostly to facilitate the sale on a retail level. The purchaser can review the performance of the mutual fund through a printed statement published by the mutual fund, or independently over the internet and determine whether they wish to retain the portions (shares or units as the case may be), sell portions or buy more portions without consulting the broker. Especially in the case of discount brokers operating impersonally over the Internet to trade shares/units for purchasers they have never met, but also when dealing via telephone or in a walk-in retail branch of the mutual fund broker, the justification no longer exists for continuing trailer fees that are charged as part of the MER as an ongoing management function.
BRIEF SUMMARY OF THE INVENTION
In accordance with one aspect of the present invention, there is provided a method of managing a mutual fund brokerage wherein subscribers, intending to purchase mutual fund portions in at least one mutual fund, enter into a service contract with the mutual fund brokerage for a predetermined duration. Each subscriber pays to the brokerage a fixed predetermined subscription charge. The brokerage maintains a separate portfolio of mutual fund portions for each subscriber and a separate subscriber's account balance including payments of the subscription charges received from each subscriber. The brokerage executes a number of mutual fund portion purchase/sell transactions on behalf of a trading subscriber with a target mutual fund selected by the trading subscriber. Importantly, one hundred percent of all service fees that are received by the brokerage in respect of each individual subscriber's mutual fund portions from each paying mutual fund are deposited in full in each said individual subscriber's account balance apportioned pro rata for each portion of said paying mutual fund in each said individual subscriber's portfolio.
In accordance with another aspect of the present invention, there is provided, a data processing system for managing a mutual fund brokerage wherein subscribers, intending to purchase mutual fund portions in at least one mutual fund, enter into a service contract with the mutual fund brokerage to maintain a portion portfolio. The data processing system includes: (1) computer processing means for processing data; and (2) electronic storage means for storing and retrieving portfolio and subscriber account data on a storage medium for each subscriber. The portfolio data includes: the number of portions owned in a mutual fund; the current portion price of each portion owned; and the aggregate total value of portions in the portfolio. The account data includes: an account balance; the duration of the service agreement; and subscriber identification data. The data processing system also includes: (3) initialisation means for initialising portfolio and account data on said storage mediu
Felten Daniel S
Jaffe Michael A.
Kusner Mark
Millin Vincent
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