December 19, 2019 | ARTICLE | BY KELLY LYNCH
Advisors serving clients investing solely in mutual funds often prefer to do this business direct rather than through brokerage, despite the operational and regulatory inefficiencies inherent in doing so.
The FundKeeper team recently conducted an informal survey of broker-dealers regarding their direct mutual fund business. The results suggest that the convenience of placing client assets directly with the mutual fund can outweigh requiring a move to traditional brokerage platforms. The survey universe was comprised of senior officials at 28 advisory firms, [some of them independent and others affiliated with insurers or banks]. The canvass revealed that the majority of firms continue to offer this option due to rep demand, yet struggle with the inefficiency of the business and could use a better solution.
The prevalence of direct-at-fund accounts at responding B/Ds
Every respondent firm lets reps open at least some customers’ accounts directly with fund families, though 14% said they may restrict the practice based on type of account or which fund family they are investing in.
We asked what percentage of customers at respondent shops have one or more positions held directly at funds and half the respondents said 50% or more of their customers do; one in five said 25-49% of their customers have positions direct at funds.
A litany of issues direct-at-fund accounts create
The biggest challenges cited by respondents were the broad inefficiencies in working with multiple fund families that direct-at-fund accounts bring to the back office and problems collecting and using non-normalized data from fund companies. Those issues were flagged by 68% of respondents.
They were followed closely by inefficiencies in opening the accounts, cited by almost two-thirds of respondents—apparently respondents are not fond of multiple forms or stuffing checks into envelopes—and compliance concerns, which are a challenge for 54%. Only a quarter of respondents cited “client/rep experience” as a challenge, but we would suggest that customer/rep experience rolls right up into the inefficient new account opening problem since the clients and reps are on the front lines in that process.
So what are broker/dealers doing about the issue?
Perhaps the most striking answers to the questionnaire came when we asked how broker/dealers are addressing the challenges of direct-at-fund accounts articulated by the vast majority of respondents.
In short, they’re not. The two most popular answers to the question (respondents were allowed to choose more than one) were “Not or Not Sure” and “Other” (68% combined). About one-third of respondents said they were pushing these investors toward a traditional brokerage solution and/or managed accounts, so it would seem those longstanding alternatives are not viewed favorably by many B/Ds.
One-in-four respondents said they were moving direct-at-fund accounts to a fund-only platform.
One of the survey participants, when asked what their firm was doing about direct-at-fund accounts had a pretty straightforward solution: they said they were no longer allowing them. And given all the headaches, its reasonable to ask why more of the participating firms haven’t come to the same conclusion.
The answer perhaps may be found in the response to the final question: At your firm, do reps/advisors want the ability to open direct-at-fund accounts for their customers? The answer to that question was an emphatic “yes” (86%), with only 7% indicating their reps were comfortable putting simple accounts into conventional brokerage accounts. This indicated to us that reps view the direct option as an important complement to the product set they can offer.
With such overwhelming support from the rank-and-file—at least among the 28 firms participating in our survey–we expect small accounts outside of brokerage are going to be around for a while. That’s why firms would do well to stop suffering through the headache and come up with better solutions for handling them—a direct-like experience that can help avoid the operational hassles and compliance risks of direct-at-fund investing.