The rebate offer could prove enticing even for smaller investors.

SAN FRANCISCO (AP) – Online brokerage E-Trade Group Inc. hopes to make mutual funds more mutually satisfying by sharing half its fees with customers.

Under a rebate program E-Trade hopes to introduce by year’s end, the company will give investors 50 percent of the so-called “12b-1” and “shareholder service agreement” fees mutual funds pay brokers.

With its move, E-Trade is breaking ranks with the rest of the brokerage industry, which collects billions of dollars annually for distributing and administering mutual funds.

The planned discounts, disclosed Wednesday, are likely to sharpen the focus on the rising investment costs in the mutual fund industry, which controlled about $6.4 trillion in assets at the end of 2002.

“It will shake things up quite a bit,” predicted Don Phillips, managing director of Morningstar Inc., which tracks the mutual fund industry. “It will be a real eye-opener for a lot of people to see just how much they have been paying on their mutual funds.”

The brokerage fees represent a slice of mutual fund expenses that totaled an estimated $62 billion last year.

The costs have been steadily rising, with expenses averaging 1.36 percent of mutual fund assets in 2002, up from 0.91 percent in 1978, according to Lipper Inc., an industry research firm.

“We think this is really going to resonate with value-conscious investors,” Jarrett Lilien, E-Trade’s president and chief operating officer, said during an interview Wednesday.

E-Trade’s offer will be particularly rewarding for wealthy investors. The Menlo-Park, Calif.-based company estimated that a $500,000 mutual fund investment generates about $2,000 annually in brokerage fees.

Under its plan, E-Trade will return $1,000 of those fees to the hypothetical account owner. The payments will be made twice yearly.

The rebate offer could prove enticing even for smaller investors, with a $50,000 mutual fund account getting an annual rebate of $100.

Since the rebates will be frequent, E-Trade believes the offer will be especially appealing to long-term investors who accumulate substantially more money over several decades.

E-Trade still hasn’t ironed out all the details with all the mutual funds it hopes to distribute. The brokerage currently sells about 3,000 different funds from 231 different families.

Lilien acknowledged not all the mutual funds are sold on the concept. “Some are wondering if this is just going to be the first domino to fall and are wondering where the last domino will fall,” he said.

E-Trade also faces possible challenges from bigger, more powerful brokerages that might threaten to stop selling mutual funds that cooperate with the rebate offer, Phillips said.