By Jason Zweig | Jan. 11, 2017 10:41 am ET
Image credit: “The Auction,” Robert Spencer (ca. 1918), The Phillips Collection
Ever since 1940, mutual-fund commissions have been non-negotiable. That could soon change.
Capital Group Cos. of Los Angeles, which runs $1.4 trillion largely in mutual funds, got approval from the Securities and Exchange Commission on Wednesday for a novel way of selling funds that it calls “Clean Shares.” The structure would get fund companies out of the business of setting commissions and fees. Instead, brokerage firms would set their own charges.
It works like this. Say you want to put $10,000 into Capital Group’s Investment Company of America mutual fund. For decades, its Class A shares have charged 5.75% up front, or $575 on a $10,000 investment — regardless of which broker sells them to you.
If, instead, you were to buy the new Clean Shares, it would be up to the broker, not the fund company, to determine how much you pay.
The move was prompted largely by the Department of Labor’s so-called fiduciary rule, said Matt O’Connor, head of North American distribution at Capital Group. That rule, imposed last year, requires brokers offering individualized advice on retirement accounts to minimize their conflicts of interest. Under the rule, brokers are discouraged from favoring funds that charge higher commissions.
Under the new fee structure, Capital Group would introduce a class of shares equivalent to a no-load fund, carrying no sales commission and no distribution or marketing fees. As a result, a broker selling those shares will collect fees directly from clients rather than from the fund company. And the brokerage firm could assess the same fees on such funds as it would on the exchange-traded funds that have been competing so fiercely for investors’ dollars.
“We hope this will be a pivotal moment in moving toward transparency on what investors are paying for advice,” said Mr. O’Connor.
Robert Plaze, a partner specializing in investment-management law at Stroock & Stroock & Lavan in Washington, said the proposed structure echoes so-called mutual fund supermarkets such as those run by Charles Schwab, where any participating fund is available at the same charge.
“How these shares are priced will be a business decision on the part of the broker, not the fund company,” said Mr. Plaze. “The forces of supply and demand will operate on that fee schedule, and that should lead to greater competition.”
For decades, mutual-fund sales charges have remained stubbornly high, often as high as 5.75% today. And distribution fees have run as high as 1%. Capital Group’s initiative is another sign that is changing, said Barry Barbash, a former head of mutual-fund regulation at the SEC who now is a partner at Willkie Farr & Gallagher in Washington.
“In reaction to the Department of Labor rule, the mutual fund industry is redoing the landscape so as not to use distribution fees,” he said.
Source: WSJ.com, MoneyBeat blog http://on.wsj.com/2ietHzx
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