Revenue shares financials sector fund investing
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Silly me for thinking such a thing. It turns out that the decision was not about the investments. To be a full partner and play on all platforms at Ameriprise, shops are required to pay up to 20 basis points per year for assets within their funds in 'marketing and sales support payments' and up to 20 basis points per year on sales as of January American Funds was not one of the seven.
Neither do I, not fully. What I do understand is that Ameriprise, as with most companies that distribute funds through online platforms, their staff of financial advisors, or both , expects to be paid by fund companies. Effectively, the fund company overcharges its customers, the distributor undercharges, then the fund company cuts a check to the distributor to settle the difference.
Both parties end up roughly where they would have been had they priced their services properly. The reason for this subterfuge rests with investors. As a general rule, they shun overt charges--brokerage commissions, account fees, and so forth. In contrast, they are relatively insensitive to asset-based arrangements, where their payments are collected quietly, behind the scenes.
That preference explains why financial advisors have moved from selling load funds to levying asset-based fees and why fund companies share their revenues with firms that distribute their wares. Throughout the industry, such deals are negotiated--and sometimes stricken. TD Ameritrade made news late last year by removing several dozen exchange-traded funds from its commission-free platform because Ameritrade and those fund companies could not agree to terms.
Nor are revenue-sharing arrangements restricted to retail brokerage platforms. The k industry is stuffed with them. Because employees also dislike paying overt fees, k plan providers frequently do the same revenue-share shuffle. The same applies to college savings plans. Misperceptions One can argue that no harm means no foul.
It abets dishonesty. The truths, to the extent that they are revealed, are buried in legal documents. Thus, Ignites got its story not from talking with Ameriprise but instead by combing through a legal filing. That is no way to inculcate trust. Consider mutual fund B shares--another form of revenue transfer. Failed Excuses The defense for such agreements is that they are openly discussed.
Revenue-sharing arrangements are not clandestine kickbacks; they are discussed in public filings. Investors can't complain they didn't know what they were getting. To start, that is not strictly true. Over the years, the regulatory agencies have frequently modified their statutes, to account for revenue-sharing deals that landed outside their rules.
Thus, investors who arrived before those legal changes were indeed unaware of the revenue sharing. More recently, according to the trade publication Ignites , the SEC filed suit against an advisory firm, Commonwealth Financial Network, for failing to inform its clients of a revenue-sharing arrangement.
Commonwealth disputes this allegation, but the action suggests that gaps remain. At any rate, even when the legal requirement is satisfied, the practical effect is negligible. Very few investors--this author included--read every filing from every fund company, brokerage platform, advisory firm, and k plan that they frequent.
Even if they did, they would struggle to decipher the relevant sections. In short, revenue sharing is an ongoing mess. Imagine entering a sporting goods store, asking about tennis rackets, and being sold a brand that rebates some of its proceeds to the retailer. Or being prescribed a drug that is manufactured by a company that recently paid for your doctor to attend a medical conference--in Bermuda.
Such practices, self-evidently, are unappealing. Of course, they are not unknown within U. Yesterday, Expedia EXPE notified me that hotels that placed at the top of my search might be there, in part, because they paid for the privilege. That did not endear me to Expedia's services, but I was not shocked. These things happen. However, I would hope and expect for better from the fund industry, particularly as its payments come directly out of shareholder assets.
Brand Management I will not overstate the case. The investment damage caused by revenue-sharing agreements is only moderate. For one, relentless pressure on fund fees has reduced the amount of revenues that funds can share. Such a feat could not occur today. The priciest of the best-selling funds have expense ratios that are only one fourth of that level, and most are lower yet. For another, as discussed in this column last month, most mistakes made by financial advisors appear to be accidental, not intentional.
As the saying goes, they eat their own cooking.
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Should You Invest in the Financial Sector? - Ep.10 - DSP Mutual Fund
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