I have witnessed a quiet revolution from within the world of finance, one that is reshaping where and how Americans invest their money. For decades, walking into a bank branch meant you could discuss a mortgage, open a checking account, and pick a mutual fund for your IRA, all in one sitting. This one-stop-shop model was a cornerstone of retail banking. But that model is fracturing. A strategic retreat is underway across the industry, as major banks increasingly halt the sale of third-party mutual funds.
This move seems counterintuitive. Why would a bank willingly forgo a stream of revenue? From the outside, it looks like a simple operational change. But from my perspective, having analyzed the product economics and regulatory pressures, this is a profound shift. It is a direct response to a perfect storm of regulation, competition, and a fundamental rethinking of what a bank’s core business should be. This isn’t just a change in product offerings; it’s a change in philosophy.
In this article, I will dissect the multifaceted reasons behind this strategic pivot. I will explore the regulatory catalyst, the fierce new competition from low-cost fintech, and the internal calculus that makes these products less attractive. Most importantly, I will provide a clear-eyed analysis of what this means for you, the investor, and how you should navigate this new landscape.
Table of Contents
The End of an Era: The Traditional Bank Brokerage Model
To understand why banks are exiting this business, we must first understand how it worked. For years, banks didn’t manage most of the mutual funds they sold. Instead, they acted as distributors, or intermediaries, for large asset management companies like Fidelity, Franklin Templeton, and American Funds.
A bank’s registered representatives—often with titles like “Financial Advisor” or “Investment Specialist”—would sit with a client and recommend a portfolio of these external, or “third-party,” funds. The bank, in turn, would earn revenue through two primary channels:
- Sales Loads: Upfront commissions taken out of the investor’s initial investment.
- 12b-1 Fees: Ongoing annual fees paid by the fund company to the bank for distribution and shareholder servicing, typically ranging from 0.25% to 1.00% of assets annually.
This was a lucrative, high-margin business that leveraged the bank’s greatest asset: its vast customer base and deep trust. But this model has come under relentless pressure from all sides.
The Regulatory Hammer: The Fiduciary Rule and Regulation Best Interest (Reg BI)
The single greatest catalyst for this change has been regulatory evolution. For years, brokers—including those working in banks—were held to a suitability standard. This meant the investment only had to be suitable for the client’s broad objectives. It did not require the broker to act in the client’s best interest, a much higher standard known as the fiduciary standard.
This changed with the Department of Labor’s Fiduciary Rule (though it was later vacated) and, more permanently, with the SEC’s Regulation Best Interest (Reg BI), which went into effect in June 2020. Reg BI elevated the standard of conduct for brokers, requiring them to act in the best interest of their retail customers without putting their own financial interests ahead of the customer’s.
This seemingly abstract legal shift had concrete and costly consequences for banks:
- Increased Compliance Burden: Banks now had to document extensive justification for why a particular third-party fund—especially one with a high fee or load—was in the client’s best interest compared to a lower-cost alternative.
- Litigation Risk: The new standard opened the door to greater legal liability and litigation if clients felt they were sold an inferior product for the sake of a commission.
- Conflict Mitigation: The inherent conflict of earning a commission for selling a specific product became much harder to justify under the “best interest” lens.
For many banks, the cost of building the compliance infrastructure to defend these sales simply outweised the revenue the products generated. It was easier to exit the business altogether than to risk regulatory sanction and legal fees.
The Economic Squeeze: Fee Compression and the Rise of Fintech
While regulation was the hammer, economics were the anvil. The entire investment world has been experiencing intense fee compression for over a decade.
- The Index Fund Revolution: The rise of Vanguard, iShares, and other providers of low-cost index funds and ETFs has conditioned investors to expect expense ratios measured in single-digit basis points (e.g., 0.03% to 0.15%). This made the expense ratios of many actively managed third-party funds, often above 0.75%, look exorbitant.
- The Zero-Commission Broker: Companies like Robinhood, Charles Schwab, and E*TRADE eliminated trading commissions, making the concept of paying a 3-5% front-end load on a mutual fund seem archaic and unfair to a new generation of investors.
- Robo-Advisors: Automated platforms like Betterment and Wealthfront offered diversified, low-cost portfolio management for a fraction of the cost of a traditional advisor, putting further downward pressure on fees.
Banks found themselves stuck in the middle. They could not compete on price with these agile, low-overhead fintech companies. The revenue from selling high-fee mutual funds was drying up as investors became more fee-sensitive and educated.
The Strategic Pivot: Focusing on Proprietary Products and Core Banking
Faced with these pressures, banks made a calculated strategic decision. If they couldn’t win as distributors of other companies’ products, they would refocus on manufacturing and distributing their own.
1. The Push to Proprietary Products and SMAs
Many large banks, such as Bank of America (Merrill Lynch), JPMorgan Chase, and Wells Fargo, have their own massive asset management divisions. They earn higher margins by selling their proprietary mutual funds and Separately Managed Accounts (SMAs). When a bank sells its own fund, it captures both the management fee and the distribution fee, and it faces fewer conflicts under Reg BI as it has greater control over the product’s structure and costs.
2. The Shift to Fee-Based Advisory
Banks are aggressively moving clients from commission-based transactions to fee-based advisory accounts. In this model, the client pays an annual fee based on a percentage of their assets under management (AUM)—for example, 1% per year. In return, they receive ongoing advice and are typically placed into a portfolio of proprietary products or a curated list of low-cost ETFs. This model is more predictable for the bank, generates recurring revenue, and aligns better with Reg BI’s requirements, as the advisor’s compensation is not tied to a specific transaction.
3. Re-Focusing on Core Banking
Ultimately, many regional and community banks have decided that wealth management is not their competitive advantage. Their strength is in lending and deposit-taking. The complexity and risk of maintaining a brokerage arm, with its demanding compliance and technology needs, became a distraction. By exiting the business, they can reallocate capital and management attention to their core competencies.
What This Means for You, the Investor
The halt of third-party fund sales is not merely an industry trend; it has real consequences for your financial choices.
The Potential Downsides:
- Loss of Convenience: The one-stop-shop model is disappearing. You can no longer assume your local bank branch can handle all your financial needs.
- Potential for Proprietary Bias: If your bank still offers investment services, be aware that their menu of options may be heavily skewed toward their own proprietary products, which may not be the best or lowest-cost options available in the wider market.
- Reduced Access for Smaller Accounts: Banks are increasingly focusing their advisory services on high-net-worth clients. If you have a smaller account, you may find yourself directed to a robo-advisor or simply told the bank no longer offers those services.
The Silver Lining and Opportunities:
- A Push Toward Lower Costs: This trend is part of a broader movement toward fee transparency. You are less likely to be sold a high-load, high-fee fund today than you were a decade ago.
- Empowerment to Shop Around: This change forces you to be a more engaged investor. The end of convenience can be the beginning of better options.
- Clearer Value Propositions: The shift to fee-based advisory makes the cost of advice more transparent. You know you are paying 1% for management, rather than wondering what hidden commissions are embedded in your funds.
Your Action Plan: Navigating the New Landscape
- Ask Direct Questions: If you are working with a bank-affiliated advisor, ask: “Are you a fiduciary?” “Do you receive commissions for selling specific products?” “What is the full list of fees I am paying, including fund expense ratios and advisory fees?”
- Compare Costs: Use the fund’s prospectus to find its expense ratio. Compare it to a low-cost index fund tracking the same benchmark. The difference is your annual drag on returns.
- Example: A \text{\$100,000} investment in a fund with a 0.85% expense ratio costs \text{\$850} per year. The same investment in an index fund with a 0.10% ratio costs \text{\$100} per year. The \text{\$750} difference compounds over time.
- Consider a Fiduciary: Look for a Registered Investment Advisor (RIA) who is legally required to adhere to a fiduciary standard at all times, not just under Reg BI.
- Embrace Self-Directed Options: For knowledgeable investors, low-cost brokerage platforms offer unparalleled access to a universe of investments without the pressure of a salesperson.
The banks’ retreat from selling third-party mutual funds is not an anomaly; it is a rational adaptation to a new world. It is a world defined by regulation that demands more, by technology that costs less, and by investors who know better. While it may mark the end of a certain kind of convenience, it ultimately marks a step toward a more transparent, competitive, and fairer system for everyone. The responsibility, however, now rests more heavily on your shoulders to ask the right questions and demand the best value for your financial future.
