The SEC has been diligent in its review of mutual fund shares purchased for clients, especially in retirement accounts, that are bought
in a higher-fee mutual fund share class because it could affect a client's returns. We can call this regulation by fining or regulators
being over the top in wanting conflict of interest disclosures to clients. But, the bottom line is that when you are recommending
a mutual fund you must determine a customer's eligibility for the least expensive share class before purchase because failure to
do so may lead to fines like in the below article. You should document this review through your contemporaneous notes/FINRA Fund
Analyzer. Additionally, if you ACAT in an account, you should review the share classes and if needed exchange the shares to the
applicable class upon receipt into the account. This issue falls under a fiduciary issue to seek out what is in the best interest
of your client relative to fees that they pay for their investments, the fees that you receive for your services and the client
receiving a higher return on his/her investment with reduced fees for fiduciary accounts. Please remember that this fiduciary duty
extends not only to advisory accounts, but also brokerage retirement accounts (thanks DOL).
I want to give you some guidance on this topic as this does not affect all of our advisors, but for those that it does please review
and let me know if you have questions.
What custodian does this mostly impact and why? RBC accounts through IPI Wealth (mainly UMAS). These accounts
are ran through our broker/dealer (they are really brokerage accounts with an advisory fee wrapped around them). RBC pays 12b1s
through Investment Planners. 12b1s are not paid in true advisory accounts like those advisory accounts held at TD or Schwab or
the RBC wrap/managed programs - any RIA that I have been at has always rebated back to the client any 12b1s received in advisory
accounts. This is a loophole for RBC and the regulators want it closed and/or reduced to be in the client's best interest. Also
keep in mind that this also affects brokerage accounts with mutual funds at RBC or held directly at a fund company that are retirement
What should I be doing in order to mitigate this issue? There are a few options that I would recommend. If
anyone else has ideas, please let me know.
1. Review your commission runs on Xtiva and see which accounts you are receiving 12b1s (it is under Mutual Fund Trailers). If applicable,
exchange the higher expense share class for the lower expense share class listed on the above RBC website for that fund family
to reduce or eliminate the 12b1 received. It is rare, but I did find a few funds in which only an A or C were available or that
the minimum entry into the fund was cost prohibitive and therefore, an A or C was the best for the client, but please know that
this is not the norm.
2. Look at the prospectus of the fund and you can see the difference in annual total share costs. I use Morningstar to easily find
this information. If you would like me to walk you through how to find it please let me know.
Let me give you a few examples so you can understand the overall concept of this issue:
1. Client ACAT in A shares of Franklin Biotechnology (FBDIX) into an advisory account. A shares have annual expenses of 1.04%. However,
RBC offers an Advisor share class in this fund available for managed accounts that has an annual expense of .79%. This fund should
be exchanged into the lower share class. You do an exchange by sending it through Workflow --- contact Operations if you need assistance
to learn how to do the workflow request.
2. Client bought C shares of Miller Convertible Bond Fund (MCFCX) into an advisory account. C shares have an annual expense of 1.99%
of which 1% of the fee is 12b1 fees. For RBC managed accounts, RBC allow this fund to be bought in the I share class which has
an annual expense of .99%. This fund should be exchanged into a lower share class through a RBC workflow request.
Below is an article that came out late yesterday regarding Ameriprise's recent fine relative to the share class issue for your review.
If you have questions, please give me a call to discuss. Thanks, Renee