UBS’s Single-Share Fund Restriction Takes Effect Mid-January
UBS Wealth Management’s decision to put the kibosh on new sales of mutual fund shares carrying front-end loads, back-end loads or 12b-1 fees in transactional brokerage accounts is effective on January 15, the company said in a filing with the Securities and Exchange Commission.
The new policy, previously announced internally, is aimed partly at meeting the forthcoming Regulation Best Interest customer-care standard of the Securities and Exchange Commission. Though less prescriptive and restrictive than the now-defunct fiduciary rule passed by the Obama administration’s Labor Department, Reg BI will require disclosure, or elimination, of conflicts-of-interest involving sales that favor brokers and firms over customers.
UBS’s new policy, however, allows brokers to continue collecting fees on fund shares that customers already hold, and will incentivize them to move customers to advisory accounts that charge asset-based fees, the U.S. brokerage arm of the Swiss banking giant said.
“The difference in compensation structure between the single share class and previously offered share classes creates a conflict of interest as Financial Advisors have an incentive to recommend that clients continue to hold the A, B, C or other share classes or recommend that those shares (including single share class shares) be moved to an…advisory program to maintain the level of revenue they receive,” UBS said in a November 27 disclosure document for its “institutional consulting” and “outsourced chief investment officer” programs.
Most large brokerage firms that compete with UBS have not announced similar single-share restrictions in transactional brokerage accounts. Some have put up client-protection guardrails, such as Morgan Stanley’s requirement that C shares convert after six years to less-expensive but front-load-carrying A shares, a restriction Merrill Lynch imposes after 10 years, and more restrictions similar to UBS’s are expected.
“The age of multiple share classes in a single [brokerage] channel is coming to an end,” said Mark Sloss, former head of investment management models and portfolios at UBS Wealth Management Americas, who is now a partner at Wilde Capital Management in New Jersey.
The single-share class also benefits fund sponsors administratively and ethically, he and others said, since customer money in funds won’t be used to finance the sales and marketing payments.
The UBS filing, which also said that the broker-dealer has made cash-sweep changes in its advisory accounts, answered several billing and administrative questions that brokers had, while leaving other issues unaddressed.
Fund shares with sales charges that are transferred into an advisory account will not be calculated into the advisory fee until 12 months have elapsed from the initial purchase, it said. Commissions charged on new single-share classes that are transferred to an advisory account will be rebated to the customer, while assets will be calculated into the advisory fee.
Some brokers and competitors said there are some customer advantages that will be lost once a single-share program begins, such as letters of intent to a fund company that locks in a commission price on future purchases when share minimums are met. But the new regulation and the growing popularity of exchange-traded funds that are more tax-efficient than mutual funds just about ensures the death of the fee-loaded share classes.
“There will be increased regulatory pressure for advisors to use a fund that is both appropriate for long-term goals and does not add undue cost,” said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, an independent research firm. “Asset management efforts to make this easier for advisors will help keep assets sticky.”
The cash-sweep changes, which began last month, move cash from advisory accounts into UBS Bank USA accounts and some third-party bank accounts, rather than into higher paying money-market funds.
The banks pay UBS Financial Services, the U.S. broker-dealer, annual fees ranging from $50 per deposit account at UBS Bank to fees that average about 1.755% annually of deposits from the outside banks.
“The compensation to UBS significantly exceeds the amount paid to clients as interest on their deposit account balances at the third-party banks,” the ADV filing says.