It's not only the small investor who bank broker-dealers may abandon as a result of the Department of Labor’s proposed fiduciary rule. Chances are they may drop their in-house mutual fund businesses too.
Huntington Bank is the latest to part with the business, selling Huntington Asset Advisors and its related mutual fund services subsidiaries in the fourth quarter of 2015.
The Columbus, Ohio-based bank said that it was following other institutions that have exited the fund business over the last few years.
Banks have indeed been shedding proprietary products for at least a decade, citing their inability to match the economies of scale, resources and risk distribution capabilities of large mutual fund providers. "I would think it is very difficult for an in-house mutual fund operation to compete economically with the giant mutual fund complexes," says Scott Stathis, managing partner of research and consulting firm Stathis Partners.
For the holdouts still hanging on to their mutual fund businesses, however, the DoL's proposed fiduciary rule may give them the final push they need to let those businesses go, analysts say. They don't want any perceived conflicts of interest stemming from the sale of in-house funds.
Such concerns may have been a factor in Huntington's recent sale, though the bank did not specifically say so. "How could a Huntington rep recommend a proprietary product that is less competitive and not have that seen as a biased recommendation and not in the best interest of the clients?" says Stathis.
J.P. Morgan, for example, recently ran into trouble with regulators for allegedly pushing in-house mutual funds to clients. Two of the bank's wealth management subsidiaries—J.P. Morgan Securities and J.P. Morgan Chase Bank—in December were ordered to pay $307 million to the SEC and the Commodities Futures Trading Commission to settle allegations that it failed to disclose conflicts of interest to clients. The regulators charged that J.P. Morgan preferred to invest clients in its own proprietary investment products without properly disclosing the preference.
“I think it gets harder and harder as you look at a fiduciary standard to prove that there’s not a conflict of interest when you’re selling your own funds,” says Thomas Kane, founder and chief of consulting firm Kane Carlton.
Other factors are creating a “perfect storm” for banks to exit the business, Kane adds. Apart from the DoL’s pending rule, the industry is moving toward a fiduciary standard and pushing for objectivity, making in-house funds undesirable. In addition, the industrywide shift to open-architecture platforms and the rise of automated investment providers and passive investing will drive the holdouts to give up on proprietary funds, Kane says.
“It's a debate that happened a long time ago and many organizations came to grips with the fact that clients were looking for more of an open-architecture objective offering and not one that contained proprietary product,” Kane says. “It’s interesting that this stuff is continuing to percolate.”
As a result of the brewing changes, Huntington is unlikely to be the last bank to divest its mutual fund business. "Any banks that have been holdouts up until now will be holding out no longer," says Stathis.