How Investors Can Guard Against Excessive Fees and Self-Serving Brokers



In an increasingly complicated and volatile investment environment, individual investors have a greater need than ever to protect their hard-earned money against both market declines and investment industry sales practices, which can be both opaque and misleading.

While market declines are an expected risk, investors’ advice from financial advisors and planners about which mutual funds to purchase may be tainted by a little-known practice called “revenue sharing.”

Revenue sharing comprises the cash payments made by mutual fund companies to selling agents, who promote their proprietary mutual funds to investors. Fund companies pay brokers, advisors, and financial planners revenue sharing that historically ranges from 0.25% to 1.5% of invested assets per year to promote their funds over the competition. Revenue-sharing payments vary depending on a mutual fund’s share class.

While this long-standing practice is legal, most financial professionals commonly fail to tell their clients why they recommend one similar fund over another, even though the revenue-sharing practice is printed in the fund prospectus. This failure to verbally disclose is often tied directly to the amount of revenue sharing the broker directly receives from the fund company to promote its funds. Critics say this failure to disclose revenue-sharing relationships creates an ethical conflict of interest with clients. 

The Department of Labor (DOL) addressed the issue of revenue sharing in 401(k) plans when it enacted fee disclosure regulations that went into effect in 2012. These regulations were primarily intended to highlight 401(k) plan fees and expenses and limit revenue sharing. While disclosure is required with other investment accounts, revenue sharing is not limited.

Pushing the Fiduciary Standard

In another long-awaited action to protect individual investors, the Securities and Exchange Commission recommended in 2011 that anyone advising retail investors adhere to a universal fiduciary duty standard. The SEC’s proposed fiduciary standard recommends that brokers “act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” However, no final decision on the enactment of rules has been made.

Currently, registered investment advisers (RIAs) must adhere to a fiduciary duty, which requires that they act in the best interest of their clients and disclose all material conflicts of interest. Broker-dealers operate under a lower standard—the suitability rule requires only that they ensure that investments conform to a client’s needs, timeline, and risk appetite.

Groups representing brokers have expressed concern that a universal fiduciary duty would undermine the broker-dealer business model (which is based on sales commissions), raise costs, and deny affordable investment help to middle-income clients. Brokers also assert that their industry is already subject to strict and consistent regulation by the Financial Industry Regulatory Authority (FINRA), which examines their operations more often than the SEC and state oversight boards review RIAs. 

Beware of “Objective” Advice

All this may sound like an esoteric argument to investors, who mistakenly thought they were getting objective advice.  But, as described in the book How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves, fees are one of the most significant factors investors can control to make their portfolios more profitable over time.

For years, brokers and planners have routinely pushed stocks underwritten by their companies (for which they get higher fees) or by mutual funds offering brokers revenue-sharing deals. Because brokers receive additional compensation for investing clients in these vehicles, investors cannot assume that the advice they are getting is objective or that brokers are not putting their financial benefit ahead of their client’s interests.

Brokers have asserted that their conflicts of interest are covered in their disclosure documents. However, studies have repeatedly found “that disclosure is, at best, insufficient for addressing conflicts of interest,” according to Knut A. Rostad, chairman of the Committee for the Fiduciary Standard. “Indeed, there is convincing evidence that disclosures are frequently confusing and misleading for investors, even when made under the best circumstances with the purest intentions.” Add in the fact that many investors do not read or understand the disclosures commonly buried in mutual fund prospectuses and broker agreements.

While this debate has been ongoing for years, it has not attracted the attention of individual investors. As a result, brokers have been working under a much less stringent set of ethical standards than RIAs, which are bound by a fiduciary standard.

This has finally become an unworkable situation. Former SEC Chairwoman Mary Schapiro said, “I believe that all securities professionals should be subject to the same fiduciary duty—and that all investors receiving advice should rest assured that the advice they get is being given with their interest at heart. But, to be effective, the fiduciary duty must be meaningful and uniform across all securities professionals. It cannot be weakened or diluted just so that it can be applied broadly.”

What Investors Should Do To Protect Themselves

Regardless of whether the SEC enacts a fiduciary standard for broker-dealers, individual investors who want objective advice can take these steps to protect their financial interests:

  • Ask your broker or financial advisor if they receive any commission, revenue-sharing, trail, or other monetary or non-monetary incentives from the fund company or brokerage firm selling the investment. If so, how much are they receiving?
  • Ask what other similar and suitable investments are available. Remember: No investment product today is unique. Other similar products are available that may be better suited to your needs.
  • If you bought mutual funds from a broker, ask if your broker has been receiving revenue for these funds. If so, ask that a portion of this money be paid to you. After all, your purchase generated the revenue-sharing in the first place. Mutual fund revenue-sharing is paid quarterly or semi-annually to the broker-dealer and the broker who sold you the mutual funds. The revenue-sharing payments could total thousands of dollars if you have owned the mutual funds for years.
  • If you want greater peace of mind about working with a broker who may have a conflict of interest when providing objective investment advice, find an RIA, a fee-only financial planner, or a financial planner who follows the fiduciary standard.
  • Ask your advisor if they consider revenue sharing a conflict of interest. Ask how your need for objective advice can be balanced against the receipt of revenue-sharing payments. (Note that even independent financial planners take revenue-sharing money, so do not assume your rep is objective unless you specifically ask about revenue-sharing deals.)
  • Another way advisors can make money at your expense is by excessive trading. While many RIAs absorb trading costs, broker-dealers do not. If you see a lot of buying and selling in your account and don’t understand why it’s taking place, you should ask for an explanation. You are paying commissions on every trade, and you may also end up with a higher tax bill if you have a lot of short-term gains.
  • If you don’t get acceptable answers that prioritize your financial interests over the advisor’s need for fees, it is time to act. Find a new rep or transfer your assets to a new no-load fund company. Do not remain with a rep who does not prioritize your interests.

Whichever type of financial professional you have (broker, RIA, or financial planner), remain vigilant about protecting your interests and getting the best objective advice possible. Don’t rely on the SEC, brokerage firms, mutual fund companies, or other large financial institutions to protect your interests.




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