Morningstar: DOL fiduciary rule reduces inflows to mutual funds with high loads

With the measure's demise, will the SEC's advice reform sustain the momentum?

Nov 15, 2018 @ 1:43 pm

By Mark Schoeff Jr.

The Labor Department's fiduciary rule reduced the amount of investor money that's allocated to mutual funds that pay brokers a premium to sell them, according to a Morningstar Inc. report released Thursday.

Since the DOL measure died in court earlier this year, it's unclear whether this trend in reduced inflows will continue under the Securities and Exchange Commission's advice reform proposal designed to raise the standard of care for brokers.

The Morningstar study says that prior to 2015, when the DOL rule was proposed, brokers were generally more likely to recommend higher-cost funds. They changed their habits to comply with the pending DOL rule.

"Flows into mutual funds paying unusually high excess loads declined after the DOL proposed its fiduciary rule in 2015, and this shift is statistically significant," according to the Morningstar report. "This reduction in the distortionary effect of conflicted payments suggests that firms put in place effective policies and procedures to mitigate conflicts of interest in response to the DOL rule and, further, that the SEC's proposal could maintain this important momentum."

The SEC is expected to release a final advice rule by the middle of next year. Whether the measure has the same impact as the short-lived DOL rule is an open question.

"It depends on how they enforce it and how seriously firms take it," said Aron Szapiro, Morningstar director of policy research.

One investor advocate said that the Morningstar findings demonstrate the effectiveness of the conflict mitigation provisions of the DOL rule. He's not sure that the centerpiece of the SEC rule, Regulation Best Interest, will have the same impact.

"It's an excellent testament that regulations with teeth can work," Knut Rostad, president of the Institute for the Fiduciary Standard, said of the Morningstar study. "In its present form, Regulation Best Interest provides none of the teeth that the DOL rule offered."

Regulation is not the only force reducing the popularity of high-load mutual funds, Mr. Szapiro said. Other factors include an industry movement toward lower-cost funds since the financial crisis and a migration of financial professionals to advisory models that require acting in a client's best interests.

A report earlier this year by the Investment Company Institute showed that expense ratios for mutual funds have been falling for more than 20 years.

"The DOL rule added fuel to the rocket ship," Mr. Szapiro said.


What do you think?

View comments

Most watched


How advisers can be a gamechanger for women investors

Why women defer to men when it comes to finances and how advisers can combat this phenomenon and make a difference for female investors, according to Heather Ettinger, founder and CEO Luma Wealth Advisors.


How the 2020 elections could impact ESG investing

Joseph Keefe, president of Impax Asset Management, on the elections and how advisers can build a bridge to the next generation of clients with ESG investing.

Latest news & opinion

Charles Schwab reportedly in talks to buy USAA brokerage, wealth management business

The deal would net Schwab roughly $100 billion in new assets.

Advisers scramble to help retirees navigate looming Fed rate cut

The Fed's first interest-rate cut in a decade has advisers warning against chasing the bait of risk over safety.

CFP Board to announce possible delay of new fiduciary standard

Organization's CEO confirms meeting with Edward Jones, says broker-dealer still considering how to move forward.

Departure of Alexander Acosta could slow DOL effort to revise fiduciary rule

Acting secretary Patrick Pizzella will have to make political decision to move ahead.

SEC member Peirce to brokers: Talk to us early, often about Reg BI implementation problems

She's willing to advocate for additional compliance time if firms have made a good faith effort.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print