Investors with small holdings in mutual funds are turning to the funds for investment advice after being abandoned by their brokers in the wake of a recent Labor Department regulation, an official with the major fund trade association said Thursday.
The shareholders are being left without any investment guidance because the funds don't have an advisory relationship with them, David Blass, general counsel of the Investment Company Institute, told the Securities and Exchange Commission Investor Advisory Committee.
“We're already seeing orphaned accounts come to the funds,” Mr. Blass said.
In his
appearance before the committee, Mr. Blass called the DOL rule “excessively convoluted” and reiterated ICI's argument that it is causing investor harm by making investment advice more expensive to give and receive.
Last April, the DOL released the final rule, which requires financial advisers to act in the best interests of their clients in retirement accounts. The initial implementation deadline is April 10, 2017, but there is speculation it could be
delayed by the incoming Trump administration.
Some investors who have rolled over small 401(k) accounts into individual retirement accounts are finding that their brokers aren't working with them when it comes to small positions they hold in mutual funds, according to Mr. Blass.
The emergent trend, for which he has only anecdotal evidence, confirms an ICI prediction about that consequence of the DOL rule, he said.
“There's no one left to advise the investors in that circumstance,” Mr. Blass said on the sidelines of the IAC meeting.
Wirehouses and independent broker-dealers have
taken varying approaches to the DOL rule. Some have taken commission-based products out of retirement accounts and only service them for a fee, while others are offering a mixture of commission and fees.
Barbara Roper, director of investor protection at the Consumer Federation of America and a member of the Investor Advisory Committee, disputed Mr. Blass' assessment of the changes occurring in the advice sector in anticipation of the rule. She noted that some firms have lowered their fees, increasing the number of people who can have accounts.
“If investors are losing access to something, it's access to sales pitches dressed up as advice,” Ms. Roper said via conference call at the committee meeting.
The committee, which was created by the Dodd-Frank financial reform law to represent the voice of the retail investor to the SEC, devoted its morning session to a discussion of top investor protection issues for 2017.
Next year, as the Trump administration comes into office, the ICI would like to see the DOL change the rule and work with the SEC, which has yet to use the authority given to it by Dodd-Frank to promulgate its own best-interests rule for all retail accounts.
“We advocate for a revision to the rule and greater coordination with the SEC,” Mr. Blass said.
But Marcus Stanley, policy director at Americans for Financial Reform, told the committee that the DOL rule should remain intact because it forces advisers to mitigate conflicts of interest.
The SEC is more permissive in its enforcement of the current best interests standard that applies to investment advisers because it stresses disclosure of conflicts.
“A disclosure-based standard falls far short of a true fiduciary duty,” Mr. Stanley said.
