The adoption, delaying, and reconsidering of the Department of Labor’s Fiduciary Rule has been a recent hot topic in the financial services industry. Much discussion and controversy has been swirling about whether the Rule would be adopted in its original form, modified in some way, or completely scrapped.
As most of you know, CCM is firmly grounded in the fiduciary standard of care. If you missed Greg Carlson’s recent article on this topic, I encourage you to read, “What the Fiduciary Rule and Telling the Truth Have in Common – and Why Both are So Freeing.”
Because we’re never ones to shy away from an equation or two, I have begun to think about the fiduciary standard through the pillars of our long standing “CCM Experience”:
Experience + Expertise + Care = Fiduciary
Like a three-legged stool, if you take away one of the pieces from the left side of the equation you are left with something incomplete—and less than what should be considered a true fiduciary. There are many money managers and brokers who have strong experience and are experts at what they do. However, without the care component driving them to match the right solution with what’s best for each client—instead having only to provide a solution that is suitable—there is something fundamentally missing.
When applying the fiduciary standard of care specifically to portfolio management, there are some fiduciary actions that are seen and experienced, while others are not. The portfolio that each CCM client is invested in has been tailored specifically for their risk tolerance, need for return, and many other specific factors that may only apply to them (such as unique investments only available through their employer’s retirement plans).
Because much of what happens with regard to our due diligence processes happens behind-the-scenes, I wanted to take the opportunity this quarter to highlight one of our most recent endeavors—and the exciting outcome.
One of the main fiduciary responsibilities that our investment team has is to find the best available funds to include in our client portfolios. Unfortunately, sometimes the marketplace doesn’t have what we’d consider “the best” funds available to meet our clients’ needs. Sometimes there are gaps…and sometimes following a true fiduciary standard requires more than just accepting what’s currently available.
For example, for our clients who reside in Minnesota, we’ve been searching for a suitable mutual fund through which they could access a low-cost, diversified portfolio of Minnesota municipal bonds (similar to options available in states such as New York or California). Unfortunately, each time we analyzed the available investment options for these types of funds, we weren’t satisfied with what we found. Unlike most asset classes that we review for inclusion in our client portfolios, there are relatively few funds that manage portfolios which allow Minnesota residents to achieve the double-tax free benefit of in-state bond ownership. When we applied our preliminary filtering criteria to this limited universe of funds, nothing met our standards in the areas of cost, diversification, and style consistency.
With so few firms managing funds in this space, paired with the fact that competition through new funds has historically been very limited (there has only been one new fund, share classes aside, launched in the Minnesota municipal bond space in the past 20 years)1, we decided to begin conversations with fund companies to find or create a solution that would meet or exceed our criteria—all with the goal of finding the best solution for our clients. Because we are fully independent, we opened up these conversations to both long- standing partners and to companies we have yet to work with.
The dialogue with firms about a new option ultimately stretched over several years and honestly, began to result in our assumption that a better solution would not be found. Often it ended up that costs would be too high to create a new option, or a strategy would be proposed that fell outside of our investment philosophy, or sometimes even outside of our goals and values.
The conversation with Dimensional Fund Advisors was one of the first we had. Dimensional quickly understood what we were trying to accomplish, and expressed a desire to help us provide a strong solution. This was encouraging to us because with Dimensional, we knew we didn’t have to worry about any misalignment of investment philosophies—that is, our goals and values regarding our clients are the same. That said, there are numerous complexities to creating a new fund such as this and it wasn’t as simple as just saying yes.
One of the primary criteria we had for the fund was cost. For context, in many mutual funds on the market, there exists a plethora of different share classes with different fee structures, designed to compensate brokers. In our research we had found this to be the case in the Minnesota municipal bond arena, so fund cost was very important to us.
Further, when it came to our standards for diversification and consistency, we wanted a portfolio of quality bonds that would be managed in a disciplined and consistent manner.
And so, after several years of discussion with Dimensional, involving many people from our stellar Regional Director, to the head of fixed income trading, to the CIO and CEO, we’re happy to share that later this month, a new Minnesota municipal bond portfolio is being launched by Dimensional Fund Advisors LP.
The fund is expected to launch with an expense ratio of 0.31%2 which, based on our research, is approximately 37% less than the expense ratio for the lowest cost Minnesota municipal bond fund available as of July 3, 2017. And when we compare the expense ratio of the fund to other Minnesota municipal bond funds available (also as of July 3) our research shows that the fund’s expense ratio is approximately 70% less than the average expense ratio of funds in this universe.3
As I said earlier, a core tenet of the fiduciary standard is matching the right solution with what is best for each individual client. Because the value of municipal bonds in a portfolio increase based on a household’s taxable income in a given year, this strategy will not be utilized in all of our clients’ portfolios. Our team of advisors, tax experts and investment specialists will be working through each individual client’s portfolio to determine if they would benefit from the new fund.
This is a really exciting development for us. While it was a behind-the-scenes effort, I wanted to share an example of how the fiduciary standard can come to life—and illustrate how you can count on CCM, and our partners, to work very hard to do what is in your best interest.
- Source: Morningstar Direct. Based on inception dates for ‘Oldest Share Class’ for mutual funds with >80% holdings in Minnesota municipal bonds.
- The expense ratio is based on anticipated fees and expenses the first full fiscal year.
- Source: Morningstar Direct. Based on mutual funds with >80% holdings in Minnesota municipal bonds as of 7/3/2017.
The information about the Minnesota Municipal Fund contained in this article is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This article is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.