Most advisors using our Flagship Select, Directions, or ESI Compass programs are aware of the work we have been doing around lowest-cost mutual fund share classes. This has been an extensive effort that began more than 18 months ago. However, a recent change we made caused some unanticipated effects to the field, for which we apologize.
One of the challenges we face as a firm, and that you also face as an advisor, is identifying the lowest-cost share class available to ESI based on our individual selling agreements with each mutual fund family. The rules are not consistent from one fund family to another. For example, American Funds does not allow R6 shares outside of group retirement plans, while Invesco allows R6 shares in fee-based accounts regardless of registration type. These inconsistencies create challenges to identify and maintain a reliable population of the lowest-cost share classes available through our firm.
Our move to FMAX and the elimination of transaction charges gave us the opportunity to complete a large share-class conversion across our APM book of business in June.
The second phase of this initiative involved reviewing approximately 17,000 mutual funds available on the NFS platform to proactively identify the lowest-cost options eligible for use in our APM programs. We worked with our vendor to narrow that list to approximately 5,300 securities and felt confident in the result.
Last week, our team created an Investment List within FMAX. The intent was to limit the universe of funds available when building models and to create investment policy alerts when an account or model held a fund that may not be the lowest-cost available option.
Unfortunately, there were complications we did not anticipate. The implementation resulted in a number of unexpected “Unauthorized Position” alerts. Some of those alerts were valid, including certain A-share mutual fund positions, but many were not. This created confusion and, in some cases, prevented advisors from trading affected accounts.
Our team made changes to the Investment List last week that resolved most of the unauthorized-position alerts. In mid-August, we will work with our vendor to convert the remaining eligible positions in our APM programs to lower-cost share classes and continue refining the logic used to build the Investment List.
Once the list is finalized, we will make it available to advisors and be transparent about how it was developed, how it will be used, and what steps we are taking next.
Please accept our sincere apology for the frustration caused last week.
We believe strongly in the value of this initiative for advisors and clients. We have made significant progress, and we are close to having a process in place that is both more reliable and easier to administer.
Abram Nunes
AVP – Brokerage and Advisory Operations