For a piece of regulation that was meant to have died, the Department of Labor (DOL)’s fiduciary rule is showing remarkable survival skills.
Not only is the rule alive, but it is very much kicking, and nowhere more so than at wirehouses and broker-dealers that are furiously cutting funds and renegotiating revenue-sharing deals in an effort to cover themselves legally and commercially for life in the new world.
The motivations for the cuts are numerous. Where funds are being cut based on performance and price this should mean advisors have better and cheaper funds left to recommend to clients, meaning they are less likely to contravene the new rule.
Where they are being cut based on low demand this is more about their commercial viability on platforms, something the tighter margins of the post-DOL world have brought into sharper focus.
Aside from the major ‘rationalizations’ (the DOL has not banned jargon) announced by a number of firms, funds are seeing their sales blocked in other, more subtle ways too.
One way is for firms to insist that sales of funds in certain accounts can only be made using a specific share class. Where a fund group does not offer this share class, their funds are essentially blocked until they do.
New revenue-sharing deals and other renegotiated platform fees also mean that funds that don’t accept the terms offered by the wirehouses will find themselves closed to new investment.
With every week bringing a new story about one set of cuts or another, we have put together a quick cheat sheet of all the major moves reported so far.
Merrill Lynch Wealth Management
As with all things DOL-related, Merrill Lynch seems to have taken a proactive approach, with the Thundering Herd announcing plans ahead of the chasing pack and pressing ahead with them, for the most part, despite doubts and delays cast over the regulation following Donald Trump’s surprise election win last year.
In May 2016 Merrill teamed up with Morningstar to up its due diligence and cut funds on its then 3,500-strong platform.
The move was set to cut the number of funds on the platform by around 40%, although this represented just 4% of assets.
Funds already needed to have $50 million of assets to be on the platform, but those that failed to garner a further $10 million of assets over a four-year period were removed.
In terms of performance, funds must either be covered by Merrill’s CIO home office due diligence team, led by former Citywire cover star Anna Snider, or be rated by Morningstar’s analyst team.
Morningstar analysts assign funds a rating on a five-tier scale, with three positive ratings of gold, silver and bronze, a neutral rating, and a negative rating. Funds with a negative rating will be removed from the platform.
Snider’s team actually upped its coverage from 500 funds to 700 funds, leaving around 1,100 to be covered by Morningstar.
Affected funds were initially closed to new investment, but clients could remain invested where they were held in brokerage accounts.
Morgan Stanley Wealth Management
Anything Merrill can do Morgan can do too.
In December last year Morgan began plans to cut around 850 funds from the 3,000 it had available at the time.
Like Merrill, the firm focused on performance and commercial viability.
Sources at the time told Citywire that the wirehouse was looking to cut those funds that had $25 million or less in total assets, as well as those that had attracted less than $10 million in assets from Morgan Stanley over four years.
Another source with knowledge of the situation said the wirehouse would consider cutting those funds with a one-star rating from Morningstar, as well as those with bottom-decile three-year returns with total expense ratios in the highest 10%.
The firm has also seen funds leave its platform as a result of renegotiating revenue-sharing deals.
From the first quarter of 2017 onward Morgan wrote to all asset managers on its platform proposing a new tiered revenue-sharing structure with a cap of 10 basis points (bps), depending on a fund’s management charges. It also proposed a new flat 6bps shareholder service charge.
This move meant Vanguard mutual funds were no longer available via Morgan Stanley as the Valley Forge-based giant refused to pay for shelf space.
Citywire has learnt that other fund groups are still deciding whether to agree to the terms, so more may follow Vanguard off the platform.
Ameriprise Financial Services
The Minneapolis-based behemoth came late to the party, but made up for it by going big. Just three days before the first part of the DOL rule came into force the broker-dealer announced it was cutting 1,500 funds from the 3,500 it had available to advisors.
Unlike Morgan and Merrill, Ameriprise gave almost no detail as to the criteria it was using to cut funds other than to say it was based on performance, the volume of assets and cost.
Citywire understands that as part of the move funds with less than $10 million of assets under management at Ameriprise and fourth quartile performance were dropped from the platform.
It was also reported by website Ignites that Ameriprise has blocked wholesalers from Pimco, Franklin Templeton and AB from approaching any of its 9,700 advisors after changes to its revenue-sharing agreements. The trio had previously only been ‘limited participation’ as opposed to ‘full participation’ firms.
Janney Montgomery Scott
Broker-dealer Janney Montgomery Scott tightened the requirements for funds to be sold on its platform, resulting in around 400 being closed to new investment.
In order for funds to receive new money they must now be either approved by Janney’s manager research team, be rated neutral or higher by Morningstar, or have a score of 75 or better from Fi360.
The move will result in around 400 funds, or 12% of the 3,400 funds on the firm’s platform, shutting to new investment, and any new fund aiming for shelf space will also have to meet one of the three criteria.
Funds currently on the platform that will be affected only account for 2.5% of assets.
Investors in the affected funds will not be forced to liquidate their positions and the screen will be run every six months, meaning funds could regain their place on the platform and reopen for investment.
However, as long as a fund does not meet the criteria, investors will not be able to top up positions in these products.
Under the Fi360 system funds are evaluated on nine criteria, including style consistency, expense ratios relative to peers, risk-adjusted performance and comparative returns.
Funds must have a minimum three-year track record and at least $75 million across all share classes. The highest score a fund can get is 0 with 100 being the worst.
Wells Fargo and LPL Financial
These two are very much known unknowns, to steal a phrase from Donald Rumsfeld.
While neither has announced a large overhaul in the manner of Merrill or Morgan, both are understood to be rationalizing.
The known knowns here are that both have made changes to the share classes advisors can use to buy funds.
LPL has told brokers they will no longer be able to sell mutual fund A shares on its managed account platform or receive 12b-1 fees from funds offered in its Strategic Asset Management advisory program. The broker-dealer will instead use the institutional share class from November.
Meanwhile, Wells has told brokers they cannot sell A or C mutual fund share classes in retirement accounts. Brokers will instead be restricted to using T-shares, which carry a front-end commission of 2.5% but lower trail, at 0.25%, than A-shares and do have the exit charges of C-shares.
Rumors that both companies were in fact slimming down their platforms and renegotiating with asset managers have abounded, but neither Wells nor LPL would be drawn on this and nothing concrete had emerged at the time of going to press.
UBS and Edward Jones
Like LPL and Wells, neither UBS nor Edward Jones have announced big fund cuts. In fact, both are on record as saying that they are not taking such action.
A spokesman for Edward Jones told Citywire: ‘In general we are always adding and removing funds based on need, but we are not “paring down” our list like other broker-dealers.
‘Some are reducing their lists from several thousand. We have about 250 for Advisory Solutions and around 800 for Guided Solutions. We are comfortable with these numbers and would not see them changing much over time.’
UBS were a little more coy, but said it had not made any announcements on this topic. This is not to say they have done nothing at all.
In August last year Edward Jones announced it would cut access to mutual funds in commission-based retirement accounts and would lower investment minimums on a number of fee-based accounts, which will continue to offer access to mutual funds.
However, just days before the rule began to come into force the firm backtracked on this, and now hopes to roll out a new account option by mid-summer that would allow for clients to use mutual funds in commission-based accounts during the DOL rule transition period which runs from June 9 to January 1 2018.
Meanwhile, UBS has made changes to the fees it charges fund groups for some administration services.
None of the funds listed above are necessarily closed on the Morgan Stanley, Janney or Merrill platforms as, in the case of the latter two, they may be covered by research teams, or in general they may not have had the ratings above at the time of the firms’ reviews.