New research by Morningstar concludes that the now-defunct Labor Department fiduciary rule accelerated an existing trend of “reducing the distortionary influence of conflicts of interest on the funds advisors recommend,” said Aron Szapiro, Morningstar’s director of policy research.
The report, “Conflicts of Interest in Mutual Fund Sales,” builds off the Labor Department’s regulatory impact analysis used in crafting its fiduciary rule to gauge how effective the rule has been in mitigating conflicts of interest.
While the report’s data “clearly shows that the DOL rule accelerated an existing trend, reducing the distortionary influence of conflicts of interest on the funds advisors recommend,” Szapiro said, “things have been getting much better for investors for years, and we see little link in recent years between conflicts of interest and worse returns.”
In proposing its fiduciary rule, which was eventually vacated by an appeals court, Labor relied on economic analysis indicating that load sharing led to investors being harmed by being put in load funds.
Labor used estimates from Christofferson, Evans & Musto that investors lost anywhere from 50 to 100 basis points in performance from load sharing to estimate that losses to investors are $8.6 billion to $17.1 billion annually, the Morningstar research points out.
Morningstar explains that it extended and augmented the analysis conducted by CEM to include more recent data and to determine what pre-existing trends in the marketplace were present at the time Labor proposed the rule.
Specifically, Morningstar states that it examined the period from 1993 to 2017 to determine “how the DOL affected flows to load funds and what pre-existing trends are relevant to this question.”
The Chicago-based fund research firm also examined data on fund returns from 1994 to 2016 to determine whether performance was affected for investors prior to the DOL rule by load sharing when lagged returns (returns from the previous year) are accounted for on a consistent basis.
“We find that, consistent with CEM, load sharing affected flows and returns during the period prior to 2009,” the report states.
While the load sharing effect was “fairly stable prior to 2014, it decreased significantly with the finalization of the DOL rule in April 2016,” the report concludes.
Morningstar also said that it found, “consistent with CEM, that excess loads lead to lower performance, but the effect declines over time.”
After 2009, Morningstar states that its research does not find “any statistically significant effect of excess loads on excess performance when we control for previous returns.”
These results imply “that the trends toward lower-cost funds and greater performance accountability were pushing in the direction of better results for investors,” the report states.
“However, we still find some net benefit of the DOL rule in reducing flows to funds with excess loads. We believe this implies there is a public benefit in maintaining strong regulations around financial advice to continue to protect investors in this area and nudging advisors to act in the best interest of those investors.”
As to Labor’s regulatory agenda that was released in mid-October and states that Labor is “considering regulatory options in light of the 5th Circuit opinion,” which vacated its original fiduciary rule, Szapiro told ThinkAdvisor that he doesn’t see “an appetite for another major fiduciary rule push” by Labor.
“We haven’t seen anything to suggest that this [fiduciary rule] is a priority at this time.”
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