Wells Fargo Advisors restricting investments for retirement accounts

Mutual fund sales will be limited to T shares, while municipal bonds, preferred stock and international debt will be prohibited.

With the Department of Labor’s fiduciary rule to take effect on June 9, Wells Fargo Advisors is putting new limits on mutual fund share classes and types of securities advisers can sell or recommend in a client’s retirement account.

Starting next month, Wells Fargo Advisors “will require all new [mutual fund] purchases in brokerage retirement accounts to be executed in Class T shares,” according to a memo sent to Wells Fargo advisers on Friday.

Non-retirement accounts will continue to use current share classes, such as A and C shares. T shares, which will have a 2.5% commission or front-end load and a 25 basis point trail, will not be available in non-retirement accounts, according to the memo.

“The T share has been designed to remove conflicts and ensure the equitable treatment of mutual fund investors,” according to the memo. Wells Fargo clients with retirement accounts that own current A or C class shares may continue to own those shares.

“I expect a lot of focus at firms to be on developing recommended and restricted lists of products,” said Jamie Hopkins, a professor in the retirement income program at The American College of Financial Services. “We’ve seen this in the trust world under state laws. There are approved investment options for a trust, and they can get very specific, too.”

“It’s also a money decision,” said Mr. Hopkins. “A firm can put a product in a discouraged type of bucket if they’re not making any significant amount of money from it. They’re asking, why take on any risk? A lot of people are having those types of conversations today.”

Meanwhile, Wells Fargo has also divided fixed income securities into two camps for retirement accounts: allowable and prohibited.

According to the memo, allowable fixed-income products include U.S. Treasuries, U.S. government agency bonds, brokered certificates of deposit, and U.S. corporate debt that meets moderate credit quality and liquidity requirements. Prohibited fixed-income securities are more esoteric, including issues by parent company, Wells Fargo & Co., all municipal bonds, including taxable munis, and corporate debt below “moderate credit quality,” according to the memo.

Other prohibited fixed income products in retirement accounts include: corporate convertible securities and structured products; preferred stock; international debt; unregistered debt; and private label mortgage-backed and other asset-backed securities.

One Wells Fargo adviser was confused by the changes, saying that he couldn’t recommend the corporate debt of a well known U.S. corporation because it did not meet new credit quality restrictions but could recommend other riskier securities under the new guidelines.

Wells Fargo Advisors recognizes that “clients need choices when making their investment decisions to help them achieve their long-term goals,” spokeswoman Emily Acquisto wrote in an email. “We are assessing the DOL’s latest guidance and will continue to evolve our strategy to ensure our clients have the best outcomes under the rule.”

This week, the DOL released a set of “frequently asked questions” that firms are now studying in order to comply with the rule.

“It’s about simplification, really,” said Denise Valentine, a senior analyst at the Aite Group. “Under the DOL, for firms not to deal with a [best interest contracts exemption], you have to have advisers on the same path.”

The BICE is a provision of the fiduciary rule that will give investors the right to bring class-action litigation against financial firms. BICE is currently set to come into force in January 2018. Brokerage firms are extremely fearful about potential litigation and the cost of lawsuits brought due to the BICE.