DOL: Cleansing Your AUM of 12B-1 Fees?

Proactive advisors are cleansing their existing and future AUM of 12B-1 mutual funds in light of the DOL's fiduciary rule. Below is a Q&A session with Mike McDaniel, practicing financial advisor, co-founder and Chief Investment Officer at Riskalyze.

Q: Why Cleanse my AUM of 12B-1 fees?

A: The DOL ruling cites 12B-1 fees as a conflict of interest (CR 21002) and having clients invested in mutual funds that charge a 12B-1 fee potentially opens the advisor up to regulatory liability. Many speculate that regulators will use fees (like 12B-1's) as a spotlight or beacon to find disciplinary targets in a "best interest" world.

Q: Do you have to sell out of mutual funds with 12B-1 fees?

A: No, you may instead choose (1) to ignore or otherwise no longer advise the client, (2) have the client sign a "best interest contract" exemption, or (3) the advisor must credit some portion of the 12B-1 fee back to the investor.

Q: How are advisors automating the best interest process (while transitioning from brokerage to advisory)?

A: The DOL rule requires an advisor to prove best interest via documenting "investment objectives, risk tolerance, financial circumstances and needs of the Retirement Investor..." (CR 21007). Advisors are using Riskalyze's Autopilot robo platform to prove, document and automate “best interest” as they convert from 12B-1 mutual funds. Using Autopilot can help transition advisors from 12B-1 fee mutual funds into non-12B-1 fee investment vehicles. This transition typically means converting a brokerage relationship into an advisory relationship.

Q: How are advisors ensuring that they won’t buy mutual funds that charge 12B-1 fees in the future?

A: Many advisors are either (1) outsourcing asset management to a third party manager (e.g. SMA managers, TAMPs or Autopilot partners like CLS Investments), or (2) building their own static models or ‘best ideas’ templates that filter out mutual funds that charge 12B-1 fees. Both options can ensure that clients won’t find themselves in funds that charge these fees.