Wells Fargo Eliminates A-Shares, C-Shares from Retirement Accounts
In the latest adaptation to the fiduciary rule governing retirement account sales that will begin taking effect on June 9, Wells Fargo told its 15,000 brokers they cannot sell A or C-class mutual fund shares or new-issue preferreds in retirement accounts.
The changes are meant to comply with the rule’s requirement that similar types of investments should be priced uniformly.
Class A shares generally charge investors a front-end load and ongoing distribution fees, or “trails,” leaving less money to be invested in funds. C-class shares typically impose a charge of about 1% if the shares are sold within one year and also can include trails.
As of June 9, Wells will restrict brokers to selling a new class of “T” shares that many fund companies have created to help comply with the fiduciary rule’s requirement to have level pricing. T shares charge a front-end commission of 2.5% plus a .25% trail to brokers for as long as an investor holds the shares.
In addition to creating “T” shares to help firms comply with the fiduciary rule, fund companies are fashioning a new class of “clean shares” to help reduce potential conflicts in compensation. Those will be sold with the promise that no investor money is deducted to pay third parties for fund services and will require broker-dealers to spell out upfront what commissions they will receive.
The Department of Labor appeared to endorse clean shares in guidance it issued on Monday about the phase-in of the fiduciary rule. While brokers must adopt a customer “best-interest” sales standard and charge “no more than reasonable compensation” as of June 9, it said it will ask broker-dealers to send in commentary on whether they will need more time to set up systems and procedures for selling clean shares before the rule’s “best-interest contract exemption” (BICE) take effect on Jan. 1, 2018, instead of setting up interim measures.
“A firm that is as big as Wells Fargo couldn’t risk not starting to take steps, even though there is some uncertainty as whether more onerous provisions of the BICE will remain intact,” said Jason Roberts, chief executive of consulting firm Pension Resource Institute in San Diego.
Wells Fargo Advisors announced the changes to brokers late last week according to “Investment News,” which reported the changes earlier on Wednesday.
The broker-dealer also has put limits on fixed-income investments sold in retirement accounts, a Wells spokeswoman confirmed.
While plain-vanilla U.S. Treasuries, agency bonds and brokered certificates of deposit will be allowed in retirement accounts, it is prohibiting sales of all municipal bonds and corporate debt below “moderate credit quality” in retirement accounts.
Also verboten will be sale of Wells Fargo parent company securities, corporate convertible securities and structured products, preferred stock, international debt, unregistered debt and private-label mortgage-backed and other asset-backed securities also are verboten.
While the changes apply to retirement accounts and mirror some of the adaptations rivals have made, the mutual-fund class share decisions follow price-sensitive decisions that registered investment advisory firms and, increasingly, broker-dealers have made in conventional accounts as well.
Rather than offer variable share classes, firms are selling so-called institutional or advisory shares of mutual funds in fee-based accounts that have lower charges than conventional shares.
Wells Fargo Advisors told its brokers in December that it will allow them to continue selling commission-based retirement accounts under the DOL’s best interest contract exemption that is currently scheduled to become effective in January. The DOL rule skews toward favoring fee-based “advisory” accounts to avoid incentivizing brokers to sell products that pay them the highest commissions or ongoing “trail” payments.
Merrill Lynch, Commonwealth Financial and JP Morgan Securities are among the few firms that have said they will ban most commission-based retirement accounts because they do not want to risk class-action lawsuits that investors will be authorized to bring under terms of the best-interest contract exemptions.