Brokerage firm advisers are offering investors fewer mutual funds because the compliance burden of putting clients into new funds are too onerous, according to a report by Westwood, Mass.-based Hobson & Co.
In today's highly regulated, post-scandal environment, two of the most burdensome tasks for advisers are deciding the appropriate share class for an investor and determining accurate break points, or the level at which clients qualify for volume discounts, the report found.
"Some advisers decide these things by routine, but that's not always the best way, because there could be changes in the prospectus or break-point tables," said Jami Axelrod, the Hobson researcher who wrote the report, which was based on interviews with registered representatives, compliance officers and other financial professionals.
The report was funded by New-River Inc., an Andover, Mass.-based software provider that sells a tool that monitors and enforces fund sale compliance.
Processing a sale with an inappropriate share class or without a proper discount can lead to problems during examinations, Ms. Axelrod said.
At the same time, registered representatives who don't offer a wide range of funds can become targets of the
Financial Industry Regulatory Authority Inc., a Washington- and New York-based regulator, the report said.
Lloyd Raines, an adviser in Stamford, Conn., with RBC Dain Rauscher Inc. of Minneapolis, said it's tough for advisers to know how many mutual fund choices they should offer clients.
"You can only know so many funds well," he said. Mr. Raines prefers to meet with money managers at conferences or at due diligence meetings so that he will know what to expect from managers of the funds he sells. For example, he likes to know ahead of time if a fund manager is likely to buy or sell securities within a fund if the market falls several hundred points, as it did in August.
If a firm doesn't offer sufficient fund choices, Mr. Raines suggests that the investment broker speak up and ask the firm to come up with alternatives.
Neal Frankle, an adviser with Wealth Resources Group Inc. in Woodland Hills, Calif., which manages about $100 million in assets, said he uses exchange traded funds almost exclusively, in part because of the limits of mutual funds.
"The nice thing about an ETF is that it's traded like a stock, so there are no share classes" and no break-point issues, he said, adding that ETF management fees are a fraction of mutual fund fees.
Brokers are required to perform break-point calculations, which are different for every fund, to determine appropriate discounts for investors. Discounts typically are offered for investments of $25,000 or $50,000, and further discounts are offered at $50,000, and $100,000 and up.
An investor's new purchase often can be combined with other investments in the same fund group to reach the total needed for a steeper discount.
In February 2004, 15 securities firms, including Richmond, Va.-based Wachovia Securities LLC and
UBS Financial Services Inc., a New York-based unit of
UBS AG of Zurich, Switzerland, agreed to pay a total of $21.5 million in fines for failing to give customers the volume discounts they should have received. The firms also agreed to return about $21.5 million in overcharges to clients.
