LPL to Banish A-Shares, 12b-1 Fees on All Advisory Accounts
LPL Financial has told brokers they will no longer be able to sell Class A mutual fund shares to customers using its major managed account platform or receive ongoing 12b-1 fees from funds offered in its Strategic Asset Management (SAM) advisory program.
Instead of Class A shares that charge front-end fees, LPL will sell only institutional shares that are generally the lowest-cost share class for investors, according to three brokers affiliated with LPL.
The simplified single share-class plan and the 12b-1 fee ban will become effective in late November, the independent broker-dealer told its almost 14,100 brokers earlier this month.
“We believe this change will….drive lower overall mutual fund fees for your clients; provide greater fee transparency; result in a more competitive platform that better reflects marketplace trends [and] mitigate potential compensation conflicts that may exist,” LPL wrote.
An LPL spokeswoman declined to elaborate on the plan, which affects pricing on thousands of funds offered on SAM, a discretionary fee-based program in which brokers make decisions about customers’ investments.
LPL’s SAM program holds around 80% of the firm’s fee-based assets, according to one of the brokers, who spoke on condition of anonymity. The firm had $189.5 billion of advisory assets as of March 31, representing almost 40% to its total advisory and brokerage assets, according to its first-quarter 2016 earnings report.
Rebating 12b-1 fees
LPL already rebates 12b-1 fees in retirement accounts to client accounts, and will do the same for general accounts as of December, according to the internal announcement.
Customers with existing A shares will be grandfathered, so brokers will not have to repaper the accounts, but brokers will not to receive the ongoing “trail” fees that are paid by fund companies. “Firms across the industry have made similar updates to their platforms, and we believe this will be the trend moving forward,” LPL said in its announcement of the changes.
The single share-class structure also will “streamline” trading charges across the managed account platform, LPL told brokers. The so-called ticket charges on I shares and A shares are generally the same, but because some I-share classes charge more LPL “is working to provide a greater choice of no-transaction-fee mutual funds,” the company said.
Given LPL’s status as the largest independent broker-dealer (and one of the largest broker-dealers of any kind when measured by its almost 14,100 brokers), the changes appear groundbreaking. Independent brokerage firms, which do not employ brokers but provide them products, marketing and regulatory services, are the biggest sellers of nontraded real estate investment trusts, variable annuities and other “private” retail products that carry high commission charges.
“I don’t think anyone has done something as sweeping,” said Scott Smith, an analyst with Cerulli Associates, speaking of independent brokerage firms.
Traditional brokerage firms where brokers are direct employees have for several years been edging customers toward lower-cost fund share classes to avoid regulatory wrath, Smith said.
Conflicts of interest
Indeed, LPL’s decision anticipates new regulatory requirements and enforcement initiatives.
The Financial Industry Regulatory Authority has imposed heavy fines on large and small firms that overcharged for fund sales this year, and the Securities and Exchange Commission this week said its inspection unit has made mutual fund fee conflicts a priority in its 2016 examinations of broker-dealers affiliated with investment advisory firms.
The Department of Labor in April will impose a fiduciary customer-care standard on sales of funds and other investments in individual retirement accounts and retirement plans. The Securities and Exchange Commission expects to impose similar standards in the future, Chairman Mary Jo White testified recently.
LPL has already modified some of its policies to accommodate the impending retirement account fiduciary rule from the DOL. For example, it no longer permits sale of C shares for investments in 529 college savings plans and is considering more restrictions on L shares more broadly as well, according to one of the brokers.
“Firms across the industry have made similar updates to their platforms, and we believe this will be the trend moving forward,” LPL wrote brokers in announcing the share-class and 12b-1 changes.