Thanks to E*Trade some fund investors may soon be able to get a quick lesson on how revenue sharing works inside the fund industry. The online brokerage and bank said Wednesday that it plans to start crediting accountholders with half of the fees it receives from fund firms participating in its fund supermarket. Essentially, investors will be paid to hold their funds in an E*Trade account.

The plan is to rebate 50 percent of the 12b-1 and shareholder service agreement fees to customers on a semiannual basis by the end of 2003. E*Trade says it plans to pay the rebate to all customers regardless of their accounts' asset size. It will require shareholders to maintain account minimums and purchase requirements as established by individual fund companies.

The broker claims to be able to operate its fund supermarket on the reduced fees because of technological efficiencies that it has created.

E*Trade officials also hope that the ploy differentiates it from other fund supermarkets. "Our view is that this provides significant differentiation for us," Lou Klobuchar, E*Trade's chief brokerage officer, told Reuters. "We anticipate additional scale. As a result of that, we don't see it having any material impact on our bottom line when you take all of that into account."

E*Trade's decision to share the fees it collects from fund firms comes on the heels of Charles Schwab's decision to boost the revenues that it collects from funds. Throughout the first half of the year Schwab quietly told fund firms that it is increasing the fee it charges OneSource NTF partners to 40 basis points from 35 basis points in most cases.

Although E*Trade cited the 40 basis point figure in its illustration of the plan, it is unlikely that it charges any fund that amount. In most cases it likely charges fees in line with the industry standard 25 basis points. At that rate, shareholders could receive payments of 12.5 basis points, or $125 on a $100,000 account.

That amount is more than most E*Trade account holders are likely to see. The brokerage claims about 3.5 million customer accounts with combined assets of roughly $56 billion. It does not provide a breakdown of mutual fund assets, but simple division suggests that its average account holds just $16,000.  

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