As brokerage firms work toward implementation of the DOL rule, the old-style direct mutual fund business is shrinking fast.

As one indication of that trend, officials at Pershing LLC last month revealed that the movement of assets held directly at fund companies has accelerated this year.

“Year to date, we’ve had 450,000 [directly held] positions move over from what was direct check-and-app business to a brokerage account,” said Mitch Bell, a Pershing director during the firm’s annual conference in June.

Pershing saw 300,000 of those types of direct transfers in all of last year.

Direct business, also called “check and application” or check-and-app business, has traditionally been used by independent reps who like to custody directly with product sponsors to cut administrative fees and nuisance charges.

But that style of business is dissipating as broker-dealers look to consolidate direct business in-house as a result of the DOL rule, which requires stricter supervision of the commissions clients pay and of the conflicts between different products.

At 1st Global, a broker-dealer catering to accounting firms, the number of directly held mutual fund accounts is down 10 percent since the beginning of 2016, said David Knoch, president. Through the first six months of this year, the number of new direct accounts was down about 20 percent.

“By year-end, I project a little over a third of our direct accounts will be closed,” Knoch predicted. At that time, the firm will end selling agreements with the 80 fund companies its reps can now custody with, and next year it will begin limiting direct business to just five of the larger providers—American Funds, Oppenheimer, Invesco, John Hancock and Franklin Templeton.

 

Advisors affiliated with 1st Global will still have access to the broader menu of funds through Fidelity Clearing and Custody, 1st Global’s clearing firm.

“We needed to … limit the direct providers so we can get a robust [data] feed” for compliance and automation, Knoch said, while preserving the check-and-app option, which works well for many small investors.

And if the industry moves to so-called “clean” shares, “I don’t know how you operate those direct,” Knoch said. “I can’t help but wonder if a policy like that ends direct [business] because you don’t do ETFs or stocks direct.”

Mutual funds themselves may turn away from the custody business. In what my be a first, the Hartford Funds last month began charging a $30-per-year fee for shareholder accounts. Beginning in October, Hartford will no longer accept new direct accounts, although existing accounts may stay and pay the new fee.

A Hartford spokesperson did not comment by press time.

“I presume the motive is that it’s less burdensome to rely on clearing partners” than holding the assets directly, Knoch said of Hartford's action.

Industry observers expect more mutual funds to follow suit.

Meanwhile, some brokerage firms have rolled out the red carpet to get advisors to consolidate fund assets onto brokerage platforms.

In January, the Advisor Group introduced a no-transaction fee mutual fund account as an alternative for direct fund business. The Direct Choice account offers funds from 14 fund partners, with no transactions fees, ticket charges or IRA fees, said Allison Pratt, vice president of sales at Advisor Group.

“We created the account … with the same economics as doing business directly,” Pratt said.

Depending on what share classes are available for the account once the DOL rule goes into effect, Advisor Group will eliminate new direct business, Pratt said.

 

Most of the $206 million in assets in Direct Choice so far have come from new money, she said, but Advisor Group has a support team that can help traditional check-and-app reps make the transition “en masse” to the brokerage firm, she said.

Early next year, LPL Financial plans to roll out its own no-fee, mutual-fund-only account, with an upfront access fee of 3.5 percent and participation from 20 fund companies with the ability to switch between them at no charge once the fee is paid or  eligible shares are transferred in. LPL has said the $50 billion of client assets held directly with fund companies will be grandfathered, but new accounts will no longer be allowed to custody directly with fund sponsors.

Finally, the mushrooming of low-minimum managed accounts has given advisors more options to use with clients who may have gone direct in the past.

Case in point: While direct business has declined at 1st Global, the firm has seen more than a 100 percent increase in new accounts this year going into advisory programs, Knoch said.

Ongoing monitoring through an advisory account is where the industry is headed, observers say, even with smaller accounts.

As for the old-fashioned check-and-app business?

“I don’t see direct-to-mutual fund business staying around,” Pershing’s Bell said last month. “It’s just really difficult for B-Ds to supervise and handle. And it’s never been terribly efficient for the asset managers or the advisor.”