The firm has contacted assets managers and advisors about the cuts, which will lead to around 840 funds out of a current 4,200 being removed from the platform. The funds being cut represent around 5% of assets under management across the firm’s platform.
The cuts will take place in three phases beginning in April and ending in July this year. The affected funds will be closed to all new investments, even from existing investors, but will not be liquidated, meaning no client will have to sell out of a position, triggering a potential tax charge.
The first phase, set to begin at the end of April, will see the firm remove what it calls ‘like funds’. This means those funds that are available in more than one vehicle from the same asset manager within a given UBS program. For example if an asset manager offers a S&P 500 index strategy both as an ETF and a mutual fund on the brokerage platform, the more expensive of these, typically the mutual fund, would be closed.
‘If a client in a particular program has a choice between two vehicles that fundamentally do the same thing and are offered by the same company and have the same portfolio manager, like an ETF compared to a mutual fund, we are analyzing that and then making the decision to close the more expensive one,’ said Traci Simpson, head of mutual funds at UBS.
The first phase of the cuts is likely to affect passive providers more than active shops. Vanguard in particular is likely to be affected as it offers its index strategies as both mutual funds and ETFs.
The second phase, which will start at the end of May, will see the firm remove ‘underutilized funds’, which have performed badly and failed to attract assets over three years or more on the platform.
The size of fund being removed depends on its asset class and category, but those with around $10 million or less are under consideration. Morningstar category performance rankings are also a factor in this phase, with those funds toward the bottom of a peer group under consideration.
Jim Langham, UBS managing director of mutual fund products, insurance and annuities, said the firm had also employed qualitative assessments of these funds, and any fund on the firm’s manager research team’s high conviction list would be saved from the cull.
‘Some of it is qualitative so there is not a secret sauce that I can cite [for why funds are cut], but we didn’t just draw a line on a quant stack,’ he said. ‘It wasn’t one size fits all with each category, we did go bespoke when we looked at each asset category to make sure we had enough quality choice remaining on the shelf.’
The majority of funds will be closed as part of the second phase.
In the final phase of the rationalization, in July, UBS will remove any fund with both no-load share classes and no 12b-1 fees from its brokerage platform. These funds will then only be available on the firm’s advisory platform, which accounts for 70% of its assets under management.
‘In brokerage today we do offer some no-load strategies. The intent is to cease offering those in brokerage and to only make those available in advisory going forward,’ said Langham.
‘What we are really trying to do is align the kinds of offering to the platform,’ Simpson added. ‘So our advisor business is all no-load, no 12b-1, so it makes sense to have better alignment and a clearer delineation between them [advisory and brokerage platforms].’
Langham said the cuts were not a reaction to the now-delayed Department of Labor fiduciary rule or new commercial terms between UBS and asset managers on the platform.
'It’s not a regulatory driver, this is purely a business decision,' he said. 'We certainly take a look at what other people are doing and understand the reasons they are doing it. For our purposes we want to make sure we have the highest quality shelf that addresses the needs of the financial advisors, that we don’t have unnecessary inventory, that we are not misaligning the inventory.’
In 2016 Merrill Lynch Wealth Management started a trend by announcing plans to cut the 3,500 funds available on its platform by 40% and signed a deal with Morningstar to increase the due diligence on those that remained.
Morgan Stanley announced its plans next, to cut a platform of around 3,500 funds down to below 2,000, based on funds’ assets and performance. Earlier this year Citywire broke the news that the second phase of these cuts have started, with a third round to come in 2019.
Broker-dealer Ameriprise has also announced plans to cut 1,500 funds from the 3,500 it had available to advisors, while Janney Montgomery Scott has made smaller moves in this direction and RBC Wealth Management has plans to do the same.
For a full run-down of cuts being made at various shops, click here.