Morgan Stanley Gives Brokers Reprieve on Mutual Fund Conversions
Morgan Stanley told its brokers this week that they will be able to collect relatively beefy 12b-1 fees on some mutual fund C-class shares a little longer than originally planned.
In line with regulatory efforts to protect customers from investing in inappropriate mutual fund classes, the company last March told advisers that C shares will automatically convert into A-class shares after being held for six years. On Wednesday, the firm told brokers it is delaying the start of the monthly migrations to June from March “in an effort to provide a seamless transition.”
The notification did not further explain the reason for the delay. A company spokeswoman confirmed the date change but declined further comment.
C-class shares generally pay brokers and their firms 1% of the value of a customer’s fund holdings annually, rather than the typical .25% trail collected on A shares. That can be a substantial difference, reducing annual fees on a hypothetical $4 million fund account, for example, to $10,000 from $40,000.
For investors, the six-year period is a conservative calculation of the point at which front-end sales charges paid on A shares from the investment pool are overshadowed by the ongoing 12b-1 fees on C-shares, which do not have an upfront load.
Several mutual fund companies in recent years imposed automatic conversion to A from C shares in holding periods ranging from seven to 10 years. Morgan Stanley said in its notification that it will impose the six-year conversion date on all C-shares, unless a fund company has a requirement for an even shorter holding period.
Under Morgan Stanley’s conversion program, investors moved into A shares will not be charged front-end loads.
The Securities and Exchange Commission and the Financial Industry Regulatory Authority have issued heavy sanctions against large and small firms in recent years for failing to train and supervise advisers on their choice of mutual fund share classes.
In a pilot program last year, the SEC offered to waive fines against broker-dealers that voluntarily disclosed they had inappropriately put customers into higher-cost fund shares. The program ended in June, and an SEC enforcement official recently said that “lots of money” is expected to be returned to investors as a result of the experiment.
Some advisers at Morgan Stanley and other firms that have adopted a fund-share conversion strategy say it is aimed at prompting them to forego 12b-1 fees altogether and move customers to fee-based advisory accounts.
Firms prefer advisory accounts because they generate revenue regardless of whether trades are made, but brokers say that buy-and-hold customers with basic investment needs often pay less with transaction accounts.
To be sure, firms are wary of putting customers into more expensive accounts, and Morgan Stanley, among others, has begun requiring brokers to convert fee accounts with little trading activity back to commission accounts.