Bank of America Merrill Lynch is revamping its fund lineup, sending some funds back down to the minors and making it easier for clients and advisers to understand sales charge reductions and waivers.
The shift, which is slated to start in the third quarter this year, means that some underperforming funds will get booted from Merrill Lynch's lineup of 3,500 funds that it offers to advisers. Many of those are small funds that have been offered for four or more years but have less than $10 million in assets, according to Ignites, an industry news service. Other funds at risk of being shuffled off to Palookaville are those with poor three-year performance and
high fees.
Merrill Lynch doesn't have a specific number of funds to cut. The due diligence process could actually bring more funds and strategies into the platform. But ultimately, the changes could result in a reduction of about 5% of the assets on the platform.
The company stressed that the lineup changes weren't spurred by the new Department of Labor
fiduciary rule, which would require advisers to steer clients towards low-cost products in retirement accounts. A company spokesman said that the changes are simply the right thing to do for clients and advisers.
Merrill's move also follows a call by the Securities and Exchange Commission for more transparency when providing fund information. The SEC Investor Advisory Committee last month
approved a recommendation for disclosure of fees in dollar amounts on customer account statements. In a second recommendation, the panel said the SEC should look for ways to put the cost information into market context — high, low or average — and explain how the costs will affect total accumulation.
The firm will also nudge funds on its platform to simplify sales charge reductions and other discounts. “Merrill Lynch is working closely with asset managers to address this challenge by streamlining the process used to identify, offer and apply sales charge waivers across all funds offered on our platform,” the company said.
Merrill Lynch is also trying to get fund companies to simplify their commission reductions, as well as the literature that describes them. Share classes, and the fees that accompany them, have multiplied at an enormous rate, drawing criticism from consumer advocates and advisers alike. The industry offered 25,038 share classes in 2015, up from 20,554 ten years earlier, according to the Investment Company Institute, the funds' trade group.
Advisers have often gotten tripped up by the myriad rules for getting reductions in sales charges, either by ignoring breakpoints or through aggregating funds in the same fund family.
In 2004, the Securities and Exchange Commission and the National Association of Securities Dealers fined 15 firms with fines totaling $21.5 million for failure to deliver mutual fund breakpoint discounts during 2001 and 2002. In October 2015,
the Financial Industry Regulatory Industry ordered to five broker-dealers to reimburse clients a total of $18.4 million for charging them improper fees for mutual funds. Merrill got slapped on the same charges in 2008 and had to rebate $24.4 million to investors.
