Post-DOL fiduciary rule, Schwab dumps load funds as advisers yawn

The move is another sign that the days of high-cost funds are numbered, and that the Department of Labor's new rule is speeding that decline

Apr 28, 2016 @ 11:16 am

By John Waggoner

You won't see hordes of angry advisers picketing Charles Schwab & Co. offices in the wake of its decision to stop selling Class A shares. But it's another sign that the days of high-cost funds are numbered, and that the Department of Labor's new fiduciary rule is speeding that decline.

“Schwab will no longer be selling Class A share funds after May 2, although they can still transfer in, custody, sell and elect dividend reinvestment for these shares,” said Schwab spokeswoman Alison Wertheim on Wednesday. “The move away from load funds has been a secular trend over the last decade or more, and Schwab has never been a significant player in this space.”

Ms. Wertheim said that in the past two years, Schwab has accommodated about 750 load-fund trades, a tiny fraction of their total trading volume.

For most registered investment advisers, Schwab's move will have no impact. “We're fee-only fiduciaries,” said Carolyn McClanahan, director of financial planning at Life Planning Partners in Jacksonville, Fla. “We never would have used load funds anyway.”

John Gugle, chief investment officer and partner at Alpha Financial Advisors in Charlotte, N.C., echoed Ms. McClanahan's sentiment. “A sales load creates a perverse incentive for the adviser to sell product and get compensated,” he said “Schwab will not be the first custodian to cut ties with mutual funds that charge sales loads. I expect others to follow.”


Schwab's move closely followed the DOL's April 6 announcement of its new fiduciary standard for retirement plans. Coincidence? You decide. But Schwab said its decision to stop selling Class A shares wasn't driven by the new rule, noting that most load funds now offer load-waived shares directly to retail clients.

“It's a housekeeping move for a low-volume business that no longer makes sense for us to administer given the breadth of our core mutual fund offer,” Ms. Wertheim said. Most RIAs who want load funds either buy the load-waived or institutional shares, she said.

Industry observers weren't terribly surprised by the news. “We've heard for a while now that firms are shying away from loads and using load-waived programs instead,” said Jeff Tjornehoj, research manager at Lipper. “It was just a matter of time before a platform the size of Schwab made the move.”

Schwab's rivals aren't piling on — yet. Vanguard, which only sells low-cost, no-load funds directly, does offer more than 16,000 funds of all strips in its discount brokerage arm. “We have no immediate plans to drop any outside fund offerings,” said Vanguard spokesman David Hoffman. “However, we are always reviewing our products and services, and will continue to do what's in the best interest of our clients.”

Similarly, TD Ameritrade spokeswoman Becky Niiya said, “We do have a small number of clients who are invested in load mutual funds and it represents a low volume of business for TD Ameritrade. We have no plans to remove them from our offering at this time.” And a Fidelity spokesman said, “Fidelity has no plans to change its fund offering. We have a diverse range of clients who have a broad range of needs, and we are committed to ensuring that we have a fund line-up that can meet all of those needs.”


Nevertheless, Schwab's move is just the latest in a broad movement away from front-end loads and towards no-load and low-fee funds and products. In the past 12 months, A shares have seen a net $102 billion outflow, according to Morningstar, the Chicago investment analysts. The market share of Class A shares has fallen from 16.96% in March 2015 to 16.43%, 12 months later.

The DOL rules should accelerate that trend, particularly as fees fall. Vanguard announced Wednesday that it had lowered the expense ratio of the world's largest stock fund, Vanguard Total Stock Market Index fund (VTSMX) by 0.01 percentage point, to 0.16%. Vanguard also dropped the expense ratio of its flagship index fund, the Vanguard 500 Index Fund (VFINX), by the same amount.

“It's a virtuous circle; investors continue to entrust us with their assets and we continue to pass along savings in the form of lower fees, while at the same time investing to improve the quality and breadth of our services,” said Vanguard CEO Bill McNabb in a statement.

Those advisers who sell loaded products still have plenty of ways to sell them, even though the door to retirement accounts may be swinging shut. For those who are already fiduciaries, however, it's simply a matter of the financial industry catching up with them. “The whole load fund business is a dinosaur,” said Paul Schatz, president of Heritage Capital, in Woodbridge, Conn.


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