DOL fiduciary rule expected to put new pressure on mutual fund expenses

Some fund share classes could be on the way out, according to a new report

Sep 23, 2016 @ 1:04 pm

By Jeff Benjamin

The ripple effects of the Department of Labor's fiduciary rule is expected to put new pressure on mutual fund fees, and could even lead to fewer fund share classes, according to a report from S&P Global Market Intelligence.

The DOL rule, which was announced in April and is scheduled to be initially rolled out in April 2017, focuses on the fiduciary responsibilities of financial advisers with regard to retirement accounts, but the ultimate fallout could spread across the fund industry, according to some advisers and industry watchers.

“I think the fund companies will start to respond by lowering fees,” said Kevin Couper, a financial adviser at Sontag Advisory.

As Mr. Couper explained, investors and advisers are already becoming increasingly fee conscious, and the DOL rule is only going to up the ante.

“We have some clients with three different S&P 500 Index funds, because when we see a fund that's 1 basis point cheaper, we buy it because every little bit helps,” he said. “From a retirement planning perspective, the DOL is not a fan of things like revenue sharing and is a fan of transparent, low-cost funds.”

(More: The most up-to-date information on the DOL fiduciary rule)

In a September survey of financial advisers and asset managers, S&P Global found that investors “should expect changes to the fund universe ahead of and following” the implementation of the DOL rule.

A big part of the changes, according to Todd Rosenbluth, S&P Global's director of mutual fund and ETF research, will involve fee compression.

“I think it's reasonable to expect pressure on fees, and I think fees will come down for some funds and some fund families,” he said.

According to Morningstar, the average expense ratio for U.S. equity open-end mutual funds is 1.206% across all 14 share classes that it tracks.

Among those share classes, institutional shares are the least expensive at 0.907%, while C-shares top the charts at 1.971%. B-shares are only slightly cheaper at 1.755%, and A-shares average 1.242%.

The increased focus on fees is just the latest blow to actively managed funds.

According to Morningstar, U.S. open-end mutual funds have suffered more than $8.7 billion in new outflows for far this year, which follows $35.1 billion in net outflows last year.

Meanwhile, the bargain-basement priced ETFs have experienced $141 billion in net inflows so far this year, following two consecutive years of more than $240 billion in net inflows.

“Asset managers will need to be cognizant that advisers will be questioning whether their clients' best interest is being served by active funds that are more expensive than their peers,” Mr. Rosenbluth said.

David Demming, president of Demming Financial Services Corp., said he has worked as a fiduciary for the past 35 years and has always focused on fees, but believes the DOL rule will force more fund companies to also start watching the fees they charge.

“Unequivocally, there will be greater disclosure, which should bring down fees,” he said.

Rose Swanger, principal at Advise Finance, said the DOL rule has the asset management industry a bit nervous and scrambling to adjust to an increased focus on fees.

“I have no doubt that the DOL fiduciary rule has already caused the whole industry to engage in a low-fee competition; it's a downward pressure for all to bear, not just asset managers from fund families, so are advisers' fees,” she said. “In addition, we have another front to engage, namely, the ultra-low cost robo-advisers.”

Requests for comments were made to several fund companies, including The Vanguard Group, Legg Mason, and Franklin Templeton.

Fidelity Investments was the only company that responded with a statement, which includes: “Fidelity is constantly evaluating the strength of our offering.

“Regardless of changes in the industry and regulatory landscape, our goal is to ensure that our solutions continue to support the needs of advisers and their clients.”

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