Advisors at Wells Fargo will have a more limited menu of investment choices available to sell or recommend to clients for their retirement accounts in advance of the Department of Labor’s fiduciary rule taking effect on June 9.
Only T-class shares will be approved for recommendation or sale to retirement account clients, although A- and C-class shares are still available for nonretirement accounts.
While customers already owning A- and C-class shares in their retirement accounts can continue to own those shares, others are out of luck.
T-class shares carry a 2.5 percent commission or front-end load and a 25-basis-point trail. In a memo sent to advisors, the firm is quoted in the report saying, “The T share has been designed to remove conflicts and ensure the equitable treatment of mutual fund investors.”
In addition, fixed-income securities have also been divided into “allowable” and “prohibited” groups for retirement accounts. The report says that fixed-income products allowed for retirement accounts include U.S. Treasuries, U.S. government agency bonds, brokered certificates of deposit, and U.S. corporate debt that meets moderate credit quality and liquidity requirements.
Among prohibited fixed-income securities are issues by Wells Fargo Advisors’ parent company Wells Fargo & Co.; all municipal bonds, including taxable munis; and corporate debt below what the memo termed “moderate credit quality.” In addition, advisors will have to avoid corporate convertible securities and structured products; preferred stock; international debt; unregistered debt; and private-label mortgage-backed and other asset-backed securities.
The report cited a Wells Fargo advisor “confused by the changes” because he said he couldn’t recommend one U.S. corporation’s corporate debt because of the new credit quality restrictions, but could approve riskier securities from other sources under the new guidelines.
One cause for concern among advisors is the DOL’s best interest contract exemption, a provision of the fiduciary rule that not only contains a number of requirements that advisors must satisfy in their status as a fiduciary but also will provide investors the right to bring class-action litigation against financial firms once it takes effect next January.