It probably won’t matter how much a pricey, underperforming mutual fund or ETF sponsor is willing to pay a broker-dealer for a spot on its platform after Regulation Best Interest goes into effect June 30.

The threat of regulatory enforcement and the impact of rising consumer demand for value is likely to far outweigh any profits that could result from offering costly laggards going forward.

That’s according to Matt Radgowski, Morningstar’s head of advisor solutions, who said the new regulation not only works to filter out higher-cost funds from firms’ platforms, but also highlights less desireable fund outliers at the recommendation level of retail transactions.

“As we’ve engaged with firms’ workflows, we are able show higher-cost options in comparison to other funds with lower costs and better performance,” added Radgowski, who said Morningstar has heard from an increased number of broker-dealers in the past 30 days.

He said the new side-by-side investment comparison reports that Reg BI mandates firms give to investors, and make available to FINRA and SEC examiners, will further make it impractical from both a compliance and business perspective to offer funds that underperform and overcharge.

“The requirement that broker-dealers either eliminate or disclose and mitigate conflicts of interest, and growing consumer demands for value, will make it harder for high-price funds that don’t offer value to stay on shelves. These regulations will accelerate the push toward lower-cost options,” Radgowski said.

“The way broker-dealers and reps work is really going to have to change under the rule and center on how and why they make investment recommendations. Each recommendation will need to be evaluated relative to reasonable alternatives and their performance, risk and explicit price."

What will the investor see after June 30 when he or she gets a Reg-BI compliant recommendation report from a rep?

First « 1 2 » Next