Wells Fargo Keeps C-Share ‘Trail’ Sale Policies Unchanged
Although many brokerage firms have been tightening policies on mutual fund share sales to conform with the Securities and Exchange Commission’s Regulation Best Interest that takes effect on June 30, Wells Fargo Advisors has decided to allow brokers to continue collecting 12b-1 fees on Class C shares for as long as ten years.
If fund companies have shorter holding periods before C shares automatically convert to A- shares, he added, those policies will, of course, prevail.
C-shares do not have upfront loads but generally pay brokers annual 12b-1 “marketing and distribution” fees of 1% for up to ten years if a client holds the fund that long. A-shares have upfront loads of around 5.75%, but pay 12b-1 fees of just .25% to the broker.
That means that investors holding C shares for ten years would pay 10% compared with 7.25% if they converted from a C share to an A share after six years.
“If you want your advisor to look out for your customers’ best interest, they shouldn’t be charging an ongoing load that’s larger than if they bought an A-share,” said Niels Holch, executive director of the Coalition of Mutual Fund Investors.
Wells’ decision is likely to please advisors without causing heightened compliance risk to the firm.
“There’s nothing specific in the regulation on conversions,” said Micah Hauptman, financial services counsel at the Consumer Federation of America. “To the extent that Reg BI is silent on the matter and gives firms broad discretion on implementation, they can use that flexibility to their advantage.”
Hauptman and other consumer advocates have criticized Reg BI as vague, and seven states and the XY Planning Network have sued to overturn the rule.
Wells’ wirehouse rivals, for their part, have imposed stricter requirements on Class C shares held in brokerage accounts in anticipation of Reg BI.
Morgan Stanley as of June 2019 began converting C-shares to A-shares after a six-year holding period (unless a fund company has a requirement for an even shorter holding period).
Merrill Lynch this month cut the C-share holding period to five years from 10 years.
UBS in January adopted a single share-class policy that does not allow new sales of any funds with upfront loads or trails.
To be sure, Wells anticipates that most of its customers with C-shares will be converted to classes with lower trails after seven to eight years as more asset managers adopt shorter holding period policies.
“Wells Fargo is supportive of, and anticipating, these conversions,” Hauser said, “but the [fund] industry is going to drive that.”
Wells is making a few changes in anticipation of Reg BI and the corollary SEC rule requiring firms to send clients Customer Relationship Summary forms outlining costs and conflicts of interests.
It is culling a “small percentage” of more expensive funds from its platform of about 3,000, Hauser said, declining to provide specifics.
Wells also is changing the way it charges customers on equity trades to make its Form CRS disclosures more understandable. It will derive a single flat fee based on the principal amount of a trade, replacing the current standard of basing commissions on a percentage of the principal, the number of shares purchased and a flat base fee. The new pricing schedule is clearer and will be net-neutral to customers’ cost, Hauser said.
Like most firms, Wells Fargo Advisors will send the four-page “Form CRS” disclosure to customers next month along with their June statements.
-Vicky Ge Huang contributed to this story.