Mutual Funds Continue Shift to Fee-Based Sales

A study by research firm Strategic Insight says that advice in the mutual fund business is increasingly provided through fee-based accounts. In 2007, about 60% of new fund sales through intermediaries occurred without front-end sales loads.

That statistic includes the sales of no-load share classes, or traditional A shares, where the loads have been waived—often because they are sold through 401(k) plans, in fund wraps or similar platforms, or through RIAs. Mutual fund wrap programs are a large part of broker/dealers’ shift from commission-based sales to fee-based “advice’ accounts, Strategic Insight says.

Lower Commission

Among the A shares sold with point-of-sales commissions, the trend is away from commissions higher than 4%. Those carrying loads of 4% or more represented only 6% of intermediary-distributed fund sales last year.

“This data shows the obsolescence of the public debate over the prevalence of “high-commissions’ at the point of sale,’ suggested Avi Nachmany, Strategic Insight’s Director of Research, in the press release.

Growing Channels

The survey found that the fastest-growing distribution channels last year were those that rely most on no-load and load-waived share classes, such as aforementioned mutual fund wrap programs, fee-only registered investment advisers (RIAs), and investment-only defined contribution plans.

The RIA population is drawing advisers seeking fee-based business and independence, and mutual funds are striving to reach this audience, Strategic Insight says.

Sales of intermediary-distributed investment-only defined contribution plans (IODC) rose 33% last year. Strategic Insight says this market should continue to grow rapidly, partly helped by the Pension Protection Act (see Investment Only to Grow in the Future).

Rapid growth also occurred in level-load shares (typically C share classes), which saw sales rise by a robust 26% last year, most likely because more financial advisers used these shares as a substitute for fee-based relationships, according to Strategic Insight.

Culture Change

Nachmany expects the current deliberations toward cost- and tax-efficient ways to pay for advice to intensify once the Securities and Exchange Commission (SEC) proposes its modifications to Rule 12b-1.

“The financial service industry continues to move towards a culture of “advice and relationships’ often packaged with an assembled portfolio of investments,’ said Nachmany. “And the retirement of Baby Boomers, who will need more customized counseling on income-in-retirement, will only accelerate these trends going forward.’

The findings from Strategic Insight were based on a survey of virtually all the large companies that distribute primarily through financial advisers; survey participants managed in aggregate 52% of industrywide U.S. open-end stock and bond fund assets as of the end of 2007, according to the press release.