Firms axe funds as best interest rolls in

Brokerage firms are cutting certain products as costs and risks increase

Firms axe funds as best interest rolls in
Those opposed to the proposed regulatory tightening in the Canadian investment industry have argued that it could result in reduced choice for investors. And they may be right, assuming Canada follows in the footsteps of the US.

In light of the fiduciary rule, a new regulation from the US Department of Labor that started to take effect in June, brokerage firms have begun to streamline their fund offerings to avoid compliance costs and increased litigation risks, according to the Wall Street Journal.

Among other things, the Obama-administration regulation generally aims to avoid conflicted advice by disallowing incentives to sell certain products. But incentivized compensation and commissions are allowed under an exemption for brokers who ensure their fees are level with similar investment products or services.

Some managers are concerned that the resulting fund reviews would be too focused on expenses and that such reviews would hurt sales of their products. Financial advisors are also worried that certain funds they’ve long used for their clients will be terminated.

USA Financial, a financial-services firm based in Michigan, has pored through its investment offerings. According to CEO Matt McGrew, the firm is preparing to cut more than 350 sales agreements across mutual funds, variable annuities, alternative investment and asset managers to well under 150.

Mark Travis, president and CEO of Florida-based fund firm Intrepid Capital Management, told the Journal that some advisors who are also years-long sellers of his funds have notified him of their firms’ plans to stop offering his products. Clients currently invested in the funds will stay with them, but no new clients will be placed in them if and when the rule takes full effect in January.

Morningstar senior analyst Jason Kephart said Intrepid’s flagship, the US$421.9-million Intrepid Capital Fund, has delivered solid returns, though it has an expense ratio of 1.4% compared with the median of 0.91% for its fund category. “That’s a significant fee hurdle,” Kephart said.

Some fund managers have claimed that moves to streamline fund offerings are simply part of their regular due diligence. Last year, Merrill Lynch slashed its mutual-fund shelf from 3,500 to 2,200; a spokeswoman said that the firm expects to cut it down to 1,800 by the end of the year as part of an enhanced due-diligence process and regular evaluation.

The rule’s supporters are apparently confident that things are proceeding in the right direction. “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,” Barbara Roper, director of investor protection at the Consumer Federation of America, told the Journal.

“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,” she said.

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