How will the DOL fiduciary rule impact broker-dealer’s direct mutual fund business?

The final Department of Labor fiduciary ruling was enacted this past April, with full implementation scheduled for April 10, 2017. While some have speculated that President-elect Donald Trump may try to repeal or at least delay the rule, betting on this can leave you potentially unprepared to comply on day one. This includes your processes for complying with new fiduciary standard compliance and the technology to implement and manage those processes.

Advantages of direct mutual fund business

As we outlined in our article Mutual Fund Direct Business – Is It a Good Option for Brokerage Firms?, the mutual fund direct business has many positive features for broker-dealer firms like yours including:

  • Direct access to the mutual fund company’s customer service group.
  • Tax reporting via the mutual fund company.
  • Simplifying the investing process for your advisors.
  • Lowering overall costs in terms of fees and processing costs.

Why your direct business might be a problem under the DOL fiduciary rule

Under the DOL fiduciary rule all conflicts of interest must be disclosed to clients when providing advice on their retirement accounts such as an IRA or a 401(k). There are a number of conflicts of interest that must be monitored and disclosed to clients.

Among these conflicts are variable compensation earned by advisors and firms from the sale of mutual funds and other financial instruments.

Beyond this, your broker-dealer will need to ensure that both the individual advisor and the firm are acting in the client’s best interests and that any advice reflects this. This will mean even greater scrutiny regarding the mutual fund families, share classes and specific funds that your firm and your advisors recommend to clients.

This will mean even greater scrutiny regarding the mutual fund families, share classes and specific funds that your firm and your advisors recommend to clients.

LPL’s decision

Giant broker-dealer LPL Financial has made the decision to end the direct mutual fund business for their registered reps and to go to their own mutual-only account as a replacement for their direct business. LPL is hopeful that many of the mutual fund families they use will create share classes to fit this new account.

Other large broker-dealers have also made a variety of decisions regarding their use of commissions and mutual funds in retirement accounts as well. Firms like LPL have the capacity to start their own mutual fund account exclusively for their reps. However, this might not be a viable solution for other firms.


What do you need to do?

As a firm, you need to decide how best to offer retirement account investments to your clients. While any current holdings can be grandfathered in via the use of the BICE (Best Interest Contract Exemption) disclosures, you will want to have policies and procedures in place for future business.

Broker-dealers who continue to conducting direct mutual fund business will need to set parameters that might be even more stringent than before. These guidelines might include:

  • Limiting the fund share classes available for use in retirement accounts.
  • Ensuring that rep compensation tiers on mutual funds across the fund families and share classes are level.
  • Managing compensation arrangements of all types across various fund families and fee-based accounts to ensure compliance with any required BICE disclosures.
One of the advantages of the direct mutual fund business is that statements and fund communications are done by the mutual fund company. Clients can also take advantage of the fund company’s customer service functions.

The use of the fund company’s communications apparatus is also an aspect that needs to be considered. Your firm will need to perform additional due diligence on this portion of your direct business to ensure that the fund company is not providing what could be construed as advice to your firm’s clients. This advice may not be intentional, but could still be problematic for your firm nonetheless.


Technology is critical

Technology has been an integral part of the financial services industry in general for many years and the direct mutual fund business specifically. This is even more true considering the DOL fiduciary rule. Here are a few areas where the proper technology will be essential in successfully managing your firm’s direct mutual fund business:

  • Monitoring and tracking the compensation, including sales loads and trailing compensation, offered by all mutual fund families and share classes that will be approved for use in your firm’s direct business going forward.
  • Working with mutual fund partners to systematize and track communications with your mutual clients to the greatest extent possible.
  • Tracking all mutual fund transactions to ensure compliance with any rules limiting funds, share classes, etc.
  • Ensuring that your advisors have complete information about their client’s holdings to safeguard that their advice is in the client’s best interest and to avoid other potential conflicts that could be in violation of the new requirements.
  • Monitor all compensation earned by your reps to ensure that they are not violating any policies that your firm institutes to comply with the new ruling and avoid conflicts of interest.

A strong partner

To accomplish all of this you will need a strong technology partner who understands your business and is on top of the new fiduciary standard compliance. The DOL ruling has many moving parts and you can easily find your firm unintentionally out of compliance.

Data aggregation and management will be essential going forward. More important is aggregating and capturing the right data and organizing it in a way that allows you to easily see what’s happening in order to make corrections, adjustments and business decisions as needed.

the proper technology will be essential in successfully managing your firm’s direct mutual fund business

As your firm navigates the new landscape under the DOL fiduciary rule Terrapin can help with managing your direct mutual fund and annuity business as well as other areas of data capture. We understand the financial services industry and work with a broad range of broker-dealers like yours. Give us a call, we’d love to learn more about your firm and how we might be able to help.

Call us at 612-244-2300 or email us at