Blunt proposal springs from open-architecture argument
By John Sullivan, AdvisorOne March 14, 2013 •
Why is it that every current wirehouse advisor says they’re
completely open-architecture, while every former wirehouse advisor says
they faced pressure to sell proprietary products?
The New York Times ginned up controversy recently with its front-page story, “Selling the Home Brand: A Look Inside an Elite JPMorgan Unit,” which reinforced the view that wirehouses put themselves first and clients second. Now Alicia Munnell (left), director of the Center for Retirement Research at Boston College, picks up the thread.
The trouble started with The Times exposé, which detailed
how advisors at JPMorgan Chase & Co. were supposedly pressured to
sell the bank’s own higher-fee products. The firm responded that their
advisors were permitted to sell third-party products on an
open-architecture platform, but some brokers—surprise—said that they
faced repercussions for doing so.
As Munnell notes in a piece posted to MarketWatch
on Wednesday, the tendency to push high-fee products goes way beyond
JPMorgan Chase and was the motive behind the Department of Labor’s 2010
proposals to eliminate 12b-1 fees for anyone who gives advice to holders
of individual retirement accounts (IRAs), including banks, insurance
companies, RIAs and broker-dealers.
So she calls for a “more direct approach,” one that actually bans
actively managed, high-fee funds from any type of account that receives
favorable treatment under the Internal Revenue Code to encourage
“Many studies have shown that actively managed funds underperform
index funds, even before accounting for the higher fees charged by the
former,” Munnell writes. “But broker-sold mutual funds perform worst of
all. One estimate is that broker-sold funds underperform average
actively-managed stock funds by 23 to 255 basis points a year.
Investments in tax-favored accounts should be limited to index funds.”
She goes on to argue that since the government “foregoes considerable
revenue” in order to encourage retirement saving, it therefore has “a
responsibility to ensure that these accounts are managed in the best
interests of participants.”
“Participants have nothing to gain on average from investing in
actively managed funds but end up in these investments either through
ignorance (in the case of 401(k) plans) or through pressured sales (in
the case of IRAs). The high fees associated with actively managed mutual
funds are not associated with higher returns. They simply frustrate the
policy objective of increased retirement saving.”
Banning actively managed funds from tax-favored plans would also
“send a message” to those investing outside these plans that they have
little to gain from active management, she concludes, giving advisors
like those in the Chase Private Client program a run for their money.