Image credit: “February” (detail), Book of Hours, Belgium, ca. 1490, The Morgan Library
By Sarah Krouse and Jason Zweig | April 27, 2016 5:30 a.m. ET
Mutual fund companies have long sold share classes of their funds with so-called loads to compensate brokers and other sales agents. But those charges have fallen out of favor amid a more intense investor focus on fund cost, a move to fee-based advice and greater regulatory emphasis on fee transparency.
Investors pulled more than $500 billion from load share classes between 2010 and 2014, while plowing $1.34 trillion into no-load share classes, according to the Investment Company Institute, a mutual fund trade group. Share classes with various types of loads represented about 20% of long-term mutual fund assets at the end of 2014, according to ICI, down from about 33% in 2005.
A spokeswoman for Schwab confirmed that as of May 2, the firm will no longer sell share classes with loads to clients. The change impacts 147 share classes of funds sold through Schwab.
“It’s a low-volume business that no longer makes sense for us to administer,” the Schwab spokeswoman said, adding that “many firms now make their funds available directly to retail clients on a load-waived basis.”
Although the firm will no longer actively sell these funds, customers will still be able to hold shares in them, she said.
Schwab’s decision comes as some industry analysts expect load fees to come under further pressure as a result of new rules on retirement advice issued earlier this month by the Labor Department. The sweeping new rules require advisers who work with retirement accounts to put their clients’ interests first and disclose conflicts of interest as well as compensation arrangements.
“Load funds, being relatively high fee [products], are probably going to be more in the spotlight and have more transparency around them, and that may push people to lower cost solutions,” William Stromberg, chief executive officer of T. Rowe Price Group, Inc., said in an interview. T. Rowe largely sells no-load funds.
Some managers say the Labor Department rule could have even more profound implications for actively managed mutual funds. Bill Miller, manager of $1.4 billion Legg Mason Opportunity Trust, said he received an email last week from a broker “who has a lot of clients in my fund.” The broker asked whether the new rules will make it difficult to buy Mr. Miller’s fund in retirement accounts, especially during a period of underperformance.
Mr. Miller said he told the broker, who works for one of the largest brokerage firms in the U.S., that “the path of least resistance for compliance departments may be to severely restrict the use of active funds.”
ICI on Tuesday urged Congress to pass a bill that would set a “best interest” standard instead of the fiduciary standard set by the Labor Department rules.
—Charley Grant contributed to this article.
Source: The Wall Street Journal