MARCH 8, 2018  |  ARTICLE  |  BY KELLY LYNCH  |

A well-debated aspect of an advisor’s fiduciary obligation to clients is investment suitability. However, advisors also play a key fiduciary role when it comes to trade execution, which is not as frequently discussed. Best execution has long been required of broker dealers in how they trade stocks and other securities. As described in FINRA regulatory notice 15-46, broker-dealers are required “to exercise reasonable care to obtain the most advantageous terms for the customer.” This generally means executing trades based on the lowest price, the fastest trade or the trade most likely to be completed.

But what about the execution of mutual funds? There are several aspects of mutual fund trading, processing and execution that require the same level of fiduciary oversight to ensure customers receive “the most advantageous terms.” For example, take a customer who has a $25,000 account that’s entirely invested in mutual funds. The broker dealer could process this account directly with the mutual fund company. Or—potentially a more likely scenario—the broker dealer would process the account through a conventional brokerage platform. And here’s where the question of the advisor’s role as a fiduciary comes into play.

The average household with a brokerage account owns $248,000 in stocks, $221,000 in mutual funds, and $51,000 in bonds[i] with the average brokerage transaction fee ranging anywhere from $10 to $75[ii]. In addition to transaction fees, brokerage account customers may also incur annual fees, inactivity fees, trading platform fees, research and data subscription fees, and paper statement fees. While a fairly complex or large-balance account may benefit from the full functionality of a brokerage platform, subjecting our $25,000 mutual fund account to the fee and complexity of a traditional brokerage platform doesn’t make sense—particularly when you consider how the customer’s overall returns would be impacted by the fees and expenses.

Unfortunately, this scenario is all too common. Many independent broker dealers and other financial intermediaries have had to adopt a “one size fits all” execution policy because there simply aren’t many options—particularly when it comes to processing smaller customer accounts or straightforward mutual fund only investor accounts. Traditionally, only two options have existed: 1) conventional brokerage or 2) the ‘check and app’ or ‘direct at fund’ model where accounts are processed directly with a multitude of mutual fund companies.  The second option provides the best execution but broker dealers are considering the first option as a means to comply with the Department of Labor fiduciary rule. This represents a paradox for these investors and their financial advisors.

Fortunately, alternative mutual fund processing models are starting to come to market. For example, Envision Financial Systems and US Bancorp Fund Services launched FundKeeper in 2017. FundKeeper is a mutual fund trading, clearing and back-office administrative and operational service that provides a more streamlined execution model without the investor level fees often times charged by a traditional brokerage platform.  FundKeeper is ideal for independent broker dealers and other intermediaries who not only want greater efficiency, control and compliance in processing mutual fund accounts, but who realize their fiduciary role extends to execution—and have been uncomfortable with the options that previously existed.

[i] DOL.gov “Brokerage Accounts in the US,” November 30, 2015 https://www.dol.gov/sites/default/files/ebsa/researchers/analysis/retirement/brokerageaccountsintheus.pdf

[ii] Nerd Wallet, “Understanding Investment Fees: From Brokerage Commissions to Sales Loads,” March 30, 2016 https://www.nerdwallet.com/blog/investing/brokerage-commissions-fees/