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Paper Links Reduced Flows to Excess Load Funds to DOL Rule

A research paper from Morningstar examines how payments to brokers drive fund flows and affect investor returns. The researchers reached a number of conclusions, including that the DOL Fiduciary Rule, which was vacated in the courts and faces an uncertain future, helped to mitigate conflicts of interest in fund sales. The researchers noted that the Department of Labor leading up to proposing the rule relied on economic analysis which indicated that load-sharing arrangements incentivized some brokers to place investors into excess load funds. That research also showed that investors lost between 50 to 100 basis points in performance from load-sharing and estimated losses to investors between $8.6 billion and $17.1 billion annually. Morningstar’s researchers looked at the DOL’s data and other factors, including the trends in the market when the DOL rule was proposed, how the proposed rule affected flows to load funds and the effect on performance. The researchers found evidence that the DOL rule may have helped to reverse the trend of inflows to funds that paid excess loads to unaffiliated brokers. “These results imply that the trends toward lower-cost funds and greater performance accountability were pushing in the direction of better results for investors; however, we still find some net benefit of the DOL rule in reducing flows to funds with excess loads.”