The Future of Mutual Funds

Brokerage firms are changing and leaving you out to dry. For example Edward Jones just released a statement that it will no longer allow its brokers to sell Mutual Funds inside of retirement accounts or IRAs!

Recently, Wells Fargo was fined over $185 million dollars for making up false accounts and trading on your bank accounts. For years, Wells Fargo employees secretly issued credit cards without a customer’s consent. They created fake email accounts to sign up customers for online banking services. They set up sham accounts that customers learned about only after they started accumulating fees.

These illegal banking practices cost Wells Fargo $185 million in fines, including a $100 million penalty from the Consumer Financial Protection Bureau, the largest such penalty the agency has issued.

Federal banking regulators said the practice, which dates back to 2011, reflected serious flaws in the internal culture and oversight at Wells Fargo, one of the nation’s largest banks. The bank has fired at least 5,300 employees who were involved.

In all, Wells Fargo employees opened roughly 1.5 million bank accounts and applied for 565,000 credit cards that may not have been authorized by customers, the regulators said in a news conference.

There is a major shakeup going on in our industry, it is broken and the Department of Labor is trying to fix it. It is my prediction that 100s of thousands of retail brokers will be out of a job next year because they can no longer sell their high commission Variable Annuities or Mutual Funds.

The Department of Labor is changing the way most Americans are currently investing their monies. In the past, many American’s would call up their local stock broker and buy stocks and pay a commission for their purchase. Many stock brokers would often recommend a mutual fund as a way to diversify away from the risk of purchasing stock in a single company. These pooled investments primarily were only available for purchase through a stock broker from companies like Franklin Templeton and American Funds.

When shopping for mutual funds, you may notice that there are varying classes of the same funds. Class A shares were a way for brokers to make their commissions on sales of mutual funds up front called front-loaded mutual funds, while the Class C shares offered commissions to brokers on the back end called back-end mutual funds. Brokers would often find similarly pooled investments broken up by different factors including: industry, value, growth, historical returns, geographic location, etc.  and present to you  for your choosing. Stock brokers had incentive to sell these mutual funds as one fund may have offered a higher commission than a comparison. It became easier to sell pooled investments and resulted in a growth of popularity. As mutual funds grew in popularity, they became easier to sell.

Most of today’s 401ks that are offered through your employer limit you to pick from only a small basket of mutual funds. The practice of selling this way was known as suitability. The Department of Labor passed a law last year that will be going into effect in April of 2017. This law is intended to change this standard from suitability to something known as a fiduciary standard. This law has not clearly defined what will be happening to mutual funds, but companies are starting to take notice. Just last month, brokerage house Edward Jones has released a statement outlining their plan for a migration away from mutual funds and commission structure for how the sale of funds will work in the future. Edward Jones is just the first of many brokerage houses to release a plan to correct their soon to be improper behavior.

These new laws will require more transparency on the expense and operation of mutual funds, as well as jeopardize their existence. These new laws represent a mind shift in the financial services industry as providing the best solutions for clients instead of brokers with thicker wallets.

Your goal should be to work with a professional who is a Fiduciary. Who has their own Registered Investment Advisor firm that places their clients’ interest first.

Plan Today. Protect Tomorrow.

Peter Blatt, J.D., LL.M.

President

Financial Advisor & Wealth Manager

Peter@BlattFG.com