Redemption Fees Help Faithful but Short Termers Often Feel Penalized

Article excerpt

It took Robertson, Stephens & Co. just one month to determine that penalizing mutual fund customers for short-term investing only makes them angry.

On Aug. 1, the brokerage firm's money management group instituted what's known as redemption fees to charge investors extra for selling mutual funds shares within a year of purchase.

Although the plan was designed to shield its six funds from wild price swings, it was suspended Aug. 28, and angry customers were reimbursed.

Robertson Stephens' flip-flop is just the latest example of the mixed feelings raised by redemption fees, which are designed to protect long-term fund investors from the expenses incurred by short-timers.

Gabelli & Co. tried charging redemption fees to holders of its Asset and Growth funds for about two years before deciding that was the wrong tack, while managers of the $350 million Clipper Fund took four years to cut out the fees. T. Rowe Price introduced redemption fees in 1993 for holders of its High Yield Fund and now applies them in six of its funds.

When shares are redeemed too often, managers are forced to tap into a fund's cash reserves or sell securities to cover the cost of refunding investors. If markets are down, managers may have to sell securities at a loss and cause the fund's market value to fall more than it might have otherwise.

"We initially thought redemption fees were in the best interest of our shareholders, because they discourage short-term trading," said Bill Ring, Robertson Stephens' sales and marketing director. "I don't know what we could have done to better anticipate what happened."

Approved by the Securities and Exchange Commission in 1979, redemption fees are levied in almost 2 percent of the nation's 7,000 mutual funds today, according to Lipper Analytical Services Inc. …