Strategic Insight (SI), an Asset International company providing authenticated business intelligence and actionable insight for the asset management community, published a new study focused on implications of the Department of Labor (DOL) fiduciary rule, slated to take effect in 2017 and 2018.
According to SI, much of the recent growth in institutional pricing demand has come from fee-based advisory programs which have seen demand shift rapidly toward funds’ lowest-cost available share classes, in anticipation of the new fiduciary paradigm.
“No Load shares with zero 12b-1 fees accounted for 66% of total mutual fund sales within fee-based advisory programs during 2015, rising significantly from just 36% in 2009,” Dennis Bowden, Strategic Insight managing director of U.S. research, tells PLANADVISER. “At the same time, A-shares sold with the load waived but carrying typically 25 basis points of 12b-1 fees declined from 51% of total fee-based sales in 2009 to 27% in 2015.”
The findings come from SI’s new report, “Fund Sales Benchmarking: 2016 Perspectives on Intermediary Sales by Share Class and Distribution Channel.” Bowden explains the study is based on SI’s proprietary survey of 35 fund firms that distribute primarily through financial advisers. Survey participants managed in aggregate $5.2 trillion in U.S. open-end stock and bond fund assets as of the end of 2015, and reported over $1 trillion in overall fund sales during the year.
“A noteworthy impact of the DOL fiduciary rule will be an acceleration of the existing movement toward lowest-cost share classes,” Bowden adds. “We have already seen this trend increasingly eliminate the use of 12b-1 fees within fee-based accounts, but looking ahead, the potential for further ‘institutionalization’ of pricing demand is an important area to monitor.”
NEXT: Implications for DC sponsors and their advisers
SI measures some additional implications from the DOL rulemaking that may be less intuitive, but which will have crucial implications for product offerings in the coming years. For example, at a high level margins are being squeezed, but the trend of sponsors pushing for access to lowest-cost institutional pricing also implies they will rely on advisers to find great deals, to keep on top of the fee monitoring, etc.
“Looking at complying with the DOL rulemaking, distributors need to equalize payment streams which they receive from funds across their platform,” Bowden says. “This may be a more powerful impetus driving further externalization of fees outside of the fund expense ratio, including payments for asset servicing. Such evolution in pricing demand would impact not only the types of share classes that mutual fund managers need to offer but also carry potential profitability implications.”
For plan sponsors, the big consideration will be: “How will costs such as those for asset servicing now be paid, and who would pay them?"
“For investors, paying for certain services outside of fund expenses does not always equate to cost savings,” Bowden warns. “And for fund managers, different potential scenarios around 'out of pocket' payment demands by distributors can carry an important profitability impact.”
The SI report goes on to suggest share classes carrying point-of-sales commissions (commissionable A-and B-shares) continue to encompass a diminishing share of overall fund activity. Such classes accounted for just 11% of aggregate sales during 2015 and only 6% of sales for the median firm in SI's study.
“At a broad level, I would say that the key pricing consideration in the context of the DOL rule is the need for price equalization up and down the value chain—between investors and advisers, funds and advisers, funds and distributor home offices, etc.,” Bowden adds. “This would definitely favor fee-based advisers from a compensation structure perspective, versus those still relying variable point-of-sale commissions, although the Best-Interest Contract Exemption would obviously allow for this, when executed properly. So the movement from brokerage to fee-based advisory will definitely be accelerated by the DOL rule.
“I would agree generally that DC specialist advisers are probably in a good place, but the impact of the DOL rule on IRA assets and also general taxable assets held at broker/dealers will be most significant—both for those advisers and brokers who must transition their business from brokerage to fee-based, as well as brokers’ compliance costs in monitoring such assets post-DOL. Within these IRA and taxable accounts, mutual fund managers will likely face increasing margin pressures as their retail distribution partners demand more institutional pricing while still requiring certain cost/revenue sharing payments.”
The Strategic Insight Fund Sales Benchmarking: 2016 Perspectives on Intermediary Sales by Share Class and Distribution Channel study was recently published as part of the new Strategic Insight In-Depth Research report series. Additional research findings and information on SI are at online at www.sionline.com.