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Other People's Money: The Email Monopoly Gouging Investors Over Shareholder Reports
Broadridge Financial Solutions charges 25 cents to send an email to investors on behalf of firms and brokers.
In 1912, Louis Brandeis wrote a series of articles in Harper’s Weekly on middlemen and monopolists in the economy, ultimately collected into a book with the pungent title “Other People’s Money: The Bankers and How They Use It.” Brandeis laid out the basic economic problem facing America. The problem wasn’t concentrated wealth, but the ability of of middlemen to control the wealth of others.
“The goose that lays golden eggs has been considered a most valuable possession,” he wrote. “But even more profitable is the privilege of taking the golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people's own money.”
The misuse of other people’s money is one of the core mechanisms by which monopolization occurs. It was in Brandeis’s day, and it still is today. And with that in mind, the Financial Times has a good story on an obscure toll-booth known as Broadridge Financial Solutions, which is the “dominant third-party vendor for distributing prospectuses, shareholder reports and proxy materials on behalf of brokers, handling more than 80 per cent of the business.” There are 140 million accountholders a year, so this is not a small business.
Broadridge charges 25 cents to send an email to an investor with material about their investments. That’s a crazy amount of money for sending bulk email. Why is Broadridge able to charge such a price and dominate the market? Simple. Other People’s Money.
Technically the customers are brokers, nearly all of whom hire Broadridge to send out mail and email with prospectuses and investment documents to their account holders. Broadridge charges these brokers a fee per mailing. So you would think that brokers would try to hire a low cost mailing house. The problem is the brokers don’t pay this fee directly, but get to charge it back to the fund or company, and ultimately, the shareholder. They are paying with Other People’s Money. Moreover, and this is why these brokers prefer a high cost option, Broadridge pays a kickback to the brokers for using their service, splitting the profits.
The situation is so bad that broker-dealers pay Broadridge more not to deliver the material, if that’s what the investor wants, with what is called a so-called ‘preference management fee.’ That was originally designed to enable investors to switch from paper statements to email, but has become a way for brokers and Broadridge to split the profits on a ridiculous charge for a bulk email service.
Now, there is a maximum fee, because the market is regulated by the New York Stock Exchange. That maximum is 25 cents, which, not surprisingly, is what Broadridge charges.
The regulator here is the Securities and Exchange Commission, which could restructure this market in a bunch of different ways. They could engage straight-forward price regulation that is more aggressive than a 25 cent fee cap. Alternatively, they could just eliminate the core conflict of interest. Instead of having the broker buy the service with Other People’s Money, the SEC could mandate that funds and firms themselves get to contract directly with mailing houses to do so. Then the price will drop dramatically, because they kickbacks will end.
And so it pretty much always goes, when you can spend Other People’s Money.