By Daisy Maxey
Is less more when it comes to investor choice? That's the
question facing brokerage firms and investment advisers as they
look to comply with a landmark retirement-savings rule.
Large brokerage firms typically offer thousands of mutual funds
to clients. But compliance demands of the fiduciary rule, which
began to take effect in June and requires stewards of
tax-advantaged retirement savings to act in clients' best interests
rather than their own, are causing some firms to review their
offerings.
Conducting the due diligence and documentation required on so
many investments can be onerous, and under the rule, some firms may
face increased litigation risks. As a result, brokerages may remove
some funds -- including those with higher fees or those that
present perceived risks -- from their sales platforms.
"If you have more than 5,000 mutual funds on your platform, that
oversight is a lot of work," said Alma Piscitello, executive vice
president of Northern Lights Distributors, which provides
underwriting services and counsels investment managers on fund
distribution.
Some brokerage and advisory firms have already told Northern
Lights of funds being pulled from brokerage platforms because of
the fiduciary rule, generally because of size or expense, Ms.
Piscitello said.
Under the Obama-era regulation, which aims to eliminate
conflicted advice that can arise when commissions are involved,
those offering financial advice to retirement savers may earn
commissions and compensation that might give them an incentive to
recommend one product over another, but must do so under an
exemption. For advisers who use the exemption, any fees must be
level with similar investment products or services. That has put
mutual funds, with their varying share classes and costs, under the
spotlight.
Advocates of the rule say weeding out high-cost or risky funds
would benefit investors. But some managers fear the fund review
will cause sales of their products to suffer and that fund expenses
may be used as the key metric in the process, while financial
advisers worry that funds they've used in clients' portfolios for
years will be discontinued.
USA Financial hasn't cut any funds from its brokerage platform,
but the Michigan-based financial-services firm has vetted its
investment offerings with the fiduciary rule in mind, said Matt
McGrew, the firm's chief operations officer.
If nothing changes and the rule takes full effect in January as
planned, USA Financial anticipates cutting its more than 350 sales
agreements across mutual funds, variable annuities, alternative
investment and asset managers to "well less than 150," Mr. McGrew
said.
But the rule remains in flux, with the Labor Department on
Wednesday proposing to delay the compliance deadline by 18 months,
which experts say suggests the rule still undergo significant
revisions.
Mark Travis, president and chief executive of Intrepid Capital
Management in Jacksonville Beach, Fla., said some advisers who have
sold his funds for years told him recently their firms plan to
stop. Clients who already have money invested in Intrepid's funds
will be able to stay invested, the advisers said, but no new money
will be allowed on some brokerage platforms after the rule takes
full effect.
Mr. Travis said one adviser is pushing back, telling his home
office that he wants to continue offering Intrepid's funds as
portfolio protection for clients. But, Mr. Travis said, the adviser
has been told to have "a plan B" ready.
Investor shares of Intrepid's flagship $421.9 million Intrepid
Capital Fund have an expense ratio of 1.4% compared with 0.91% for
the median fund in its category, according to Morningstar Inc.
"That's a significant fee hurdle," said Jason Kephart, a senior
analyst at Morningstar. Still, the fund's long-term performance has
been solid, he added. The fund, which focuses on protecting
investors' capital, lost just 16.7% in 2008 during the financial
crisis as its average peer shed 28%.
Among bigger brokerages cutting fund offerings, some cite the
fiduciary rule as impetus while others say it's simply part of
regular due diligence.
LPL Financial said it plans to launch a new mutual-fund platform
early next year to standardize advisers' compensation to comply
with the rule. The platform will offer fewer fund families than its
existing platform and limit upfront commissions and trailing fees,
or annual commissions.
Bank of America Corp.'s Merrill Lynch unit last year trimmed its
mutual-fund offerings to 2,200 from 3,500, and expects to cut that
number to 1,800 by year's end. The move is part of an enhanced
due-diligence process and regular evaluation of its lineup, and not
related to the fiduciary rule, a spokeswoman said.
Advisers who are using funds that have been cut from fee-based
accounts can keep their existing positions, the spokeswoman said,
but must do so within commission-based accounts and won't be
permitted to add new assets.
To comply with the fiduciary rule, Merrill has shifted to
fee-based retirement accounts with some limited exceptions.
Advocates of the rule had hoped it would lead to a re-evaluation
of investment offerings. The Obama administration said its goal in
pursuing the rule was to protect unwitting individual investors
from conflicted advice, which it said costs American families
billions of dollars a year and pushes down annual returns on their
retirement savings.
"It was always a feature of this rule that it was going to force
investment products to compete under a best-interest standard
instead of competing to be sold by paying the broker more
generously," said Barbara Roper, director of investor protection at
the Consumer Federation of America. "Forcing investment products to
compete based on cost and quality will be best for investors, even
if every decision made in narrowing these fund menus doesn't
optimize the outcome."
(END) Dow Jones Newswires
August 12, 2017 07:14 ET (11:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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