The big bucks mutual fund firms kick back to wealth managers

June 30, 2023 4:43 PM

Three years to the day after the SEC's Regulation Best Interest went into effect, a common industry conflict of interest remains a huge but murky source of business.

The sampling below of disclosures from Ameriprise, LPL Financial, UBS, Morgan Stanley, Edward Jones, Merrill, Osaic (formerly Advisor Group), JPMorgan Chase, Wells Fargo and Raymond James sheds light on the extent of revenue sharing in the industry, the varying information firms provide about it and what they say they're doing to mitigate the conflict.

Mutual fund managers, whose products the firms' financial advisors recommend, pay wealth management companies a portion of their profits or revenue that the firms often refer to as "marketing" or "partner" fees. The amount of the revenue-sharing payments usually stems from the level of assets invested in the fund companies' products. As shown by the companies' disclosures, the money can add up to hundreds of millions of dollars or more in added revenue each year for the largest wealth management firms.

Those payments have "largely replaced" a different stream of money flowing between product sponsors and wealth managers called 12b-1 fees, which are known as "distribution" costs, according to Micah Hauptman, the director of investor protection at the nonprofit Consumer Federation of America. That means that "more opaque forms of third-party payments and their associated conflicts of interest have replaced more transparent third-party payments," he said in an email.

"These arrangements are often opaque and difficult to understand," he said. "Revenue sharing is often used by funds to encourage and reward broker-dealers and investment advisers and their reps to recommend certain funds over others. In other words, revenue sharing can influence financial professionals to recommend products based on factors other than their clients' or customers' best interests. It is unlikely that disclosure alone will adequately address this conflict of interest."

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Hauptman praised the Securities and Exchange Commission's "important enforcement actions" against some firms the regulator accused of breaching their duty to disclose the conflict fully and clearly, but he added that "more must be done to reduce these conflicts of interest rather than allowing firms to rely on disclosure to address these conflicts of interest."

Asked about the wide differences in the details shared on the firms' websites and in other disclosures, representatives for the SEC declined to comment. The regulator's guidance to the industry about Reg BI in recent years has warned wealth management firms that revenue sharing represents a potentially relevant factor to the cost of an investment and a compensation incentive of the type that they could rein in under compliance with the three-year-old rule.

"When there is a conflict created by firms or their financial professionals receiving compensation from third parties, whether or not sales-related (including, but not limited to, revenue sharing, sub-accounting, administrative services fees paid by a fund or its advisor), in the staff's view, broker-dealers, investment advisors or their financial professionals should disclose the existence and effects of such incentives provided to the firm or shared between the firm and others," according to an SEC staff bulletin released last year.

In the wake of that guidance, certain firms are providing much more detail than others to advisors, clients and the public about their relationships with mutual fund companies. Ameriprise and Edward Jones are the only firms that displayed the exact amount of the revenue sharing payments they received on their website. In contrast, the page of UBS didn't show a listing of the companies participating in the firms' revenue sharing programs.

Scroll down the slideshow for some of the most interesting information about revenue sharing at 10 of the largest wealth management firms. To see coverage of SEC guidance about firms' conflicts of interest obligations under Regulation Best Interest, click here. And for a look at the latest numbers on the size and scale of registered investment advisory firms, follow this link.

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Note: The information below came from the companies' available disclosures through their websites, earnings reports and regulatory disclosures, as well as inquiries to each of the firms. The links to each of the documents referenced below contain their full language and available numbers, as of June 30, 2023.

Ameriprise

Revenue sharing explanation: Ameriprise explains its relationships in full detail between the firm and advisors and more than 135 mutual fund firms offering 2,200 products to the company's clients. "Full participation" mutual fund firms pay Ameriprise up to 0.20% per year or more in certain cases for "cost reimbursement" relating to "distribution, marketing, administration and shareholder servicing support, applicable product due diligence, training and education and other support related functions such as trading systems, websites and mobile applications."

"The most significant of these payments are reimbursement for marketing and sales support received from the product companies," the firm's disclosure said. "If Ameriprise Financial Services and/or AEIS did not receive this compensation, Ameriprise Financial Services would likely charge higher fees or other charges to clients for the services provided."

Names/numbers: A subsidiary of Ameriprise, American Enterprise Investment Services, received $357.4 million in the revenue sharing payments in 2021 from fund firms including: Columbia Threadneedle Investments, another Ameriprise affiliate, which paid $80.1 million; MFS Investment Management ($28.7 million); Fidelity Investments ($25.1 million); BlackRock ($20.8 million); and JPMorgan Chase ($18.2 million).

Company response: "Our firm's information about revenue sharing is publicly available on Ameriprise.com," spokeswoman Ali Mueller said in an email. "Links are below:"

LPL Financial

Revenue sharing explanation: In a 17-page disclosure from a section of its website with legal documents, LPL spells out every form of third-party payments that represents a conflict of interest. The revenue from fund companies and other product sponsors "can cause customers to pay higher overall fees and expenses and have an impact on the investment performance of an account," according to the document.

"LPL has conflicts of interest like all financial services companies. As an LPL customer, it is important to understand that LPL's receipt of third-party compensation creates a conflict of interest for LPL, which means that there is an incentive for LPL and its financial professionals to recommend investment products that pay third-party compensation," it said. "LPL receives significantly more third-party compensation from the product sponsors for which LPL's clients have the largest holdings, which creates a conflict of interest for LPL to promote and recommend these product sponsor's investments. Additionally, LPL generally receives higher rates of Third Party Compensation from investments with higher management fees, which creates an incentive for LPL to promote or recommend these investments. Other investment products with lower management fees that do not pay third party compensation are available."

Names/numbers: LPL received "other asset-based" revenue of $806.6 million in 2022, including all third-party compensation from product sponsors, according to its fourth-quarter earnings statement. The company's website didn't provide an itemized listing of the amount of marketing support, concessions, recordkeeping fees and other kinds of payments from mutual fund firms, beyond stating the names of hundreds of product sponsors participating in its programs. The third-party compensation disclosure listed marketing support payments of up to 0.25% of a client's assets in mutual funds and 0.20% of the expense ratio of ETF investments, plus a flat fee of as much as $1 million based on the size of the customers' holdings.

Company response: The company didn't respond to emails seeking comment.

UBS

UBS said it wants to bring more transparency to philanthropy and use investment capital to lower the risk that nonprofits take on in running programs - freeing up their resources to pursue even more projects.

Revenue sharing explanation: Mutual fund companies pay UBS and affiliates revenue sharing "based on two components: (i) the amount of sales by UBS Financial Services of a particular mutual fund family to our clients (excluding sales through wrap-fee programs), and (ii) the asset value of a mutual fund family's shares held by our clients at UBS Financial Services (including wrap-fee programs)," according to a disclosure from the firm's website. Other than in terms of the product sponsors' contributions to "training and educational" events and non-cash compensation such as "promotional items, occasional gifts, meals, tickets and other entertainment," advisors don't receive any money from revenue sharing, according to the firm.

"Many mutual fund companies pay revenue sharing to us, including our affiliate, UBS Asset Management," the disclosure stated. "UBS Financial Services determines the level of access to our branches based on our own review and evaluation of mutual funds and fund families. There are multiple factors involved in determining a particular mutual fund's level of access to our branches. Although revenue sharing is one factor, others include understanding of business goals, quality of sales personnel and marketing material, range of products, level of service to financial advisors and branch managers, participation of funds in researched investment models, and branch discretion."

Names/numbers: Each participating mutual fund family pays 0.15% per year on all brokerage sales besides money market and offshore funds and up to 0.20% annually of assets in equity or bond shares.

Company response: UBS spokesman Jonathan Humphreys directed inquiries to the "product and service-specific information" section of the firm's website. "All of our disclosures are available on ubs.com, and can be found here," Humphreys said in an email.

Morgan Stanley

Revenue sharing explanation: The disclosures section of Morgan Stanley's website has a specific brochure on mutual fund and ETF companies' revenue sharing and a more comprehensive document on product features, share classes and compensation. Account opening documents and client transaction confirmation statements contain information about revenue sharing as well.

Since the firm receives "significantly more revenue sharing from the families with the largest client mutual fund and actively managed ETF share holdings at our firm," the payments represent a conflict "to promote and recommend" products from those families rather than from product sponsors that "pay us less revenue sharing," according to the specific disclosure on the practice. And, since Morgan Stanley gets higher payments from investments into funds that have greater expenses, it has a conflict to sell more costly products.

"In order to mitigate this conflict, financial advisors and their branch managers do not receive additional compensation as a result of revenue-sharing payments received by Morgan Stanley," the document said. "Moreover, for advisory account clients, the fees are rebated."

Names/numbers: The revenue sharing comes from a "support fee" paid by mutual fund and actively managed ETF companies of up to 0.10% per year, or $10 per $10,000 in assets. In a non-itemized ranking of the dozens of fund firms paying support fees of at least $250,000 annually in order of the companies paying the most to Morgan Stanley, the document listed Franklin Templeton and its subsidiary, Legg Mason, in the No. 1 spot, followed by American Funds, Morgan Stanley/Eaton Vance, BlackRock, Invesco, JPMorgan Chase, PIMCO, Columbia Threadneedle, MFS Investments and Lord Abbett.

Company response: Representatives for the company directed inquiries to the disclosures available on the firm's website.

Edward Jones

Revenue sharing explanation: Edward Jones receives revenue sharing payments from mutual fund companies, 529 plan program members and insurance companies, according to a concise yet comprehensive document accessible through the firm's disclosures page.

"Virtually all of Edward Jones' transactions relating to mutual funds, 529 plans and annuity products involve product partners who pay revenue sharing to Edward Jones," the document said. "We do not receive revenue sharing payments on assets within investment advisory programs. We want you to understand that Edward Jones' receipt of revenue sharing payments creates a potential conflict of interest in the form of an additional financial incentive and financial benefit to the firm, our financial advisors and equity owners in connection with the sale of products from these product partners."

Names/numbers: Last year, Edward Jones amassed $287.8 million in revenue sharing payments from mutual fund companies and 529 product partners based on payments of up to $13 per $10,000 in eligible client assets, according to the document. Affiliates of American Funds ($110 million), MFS Investments ($35.1 million), Invesco ($27.7 million), Franklin Templeton ($27.6 million) and Hartford Funds ($20.3 million) paid the largest amounts.

Company response: Representatives for the firm directed inquiries to the disclosure section of the firm's website.

Merrill

Revenue sharing explanation: A disclosure page available through the public "My Merrill" website includes a 20-page mutual fund disclosure and a listing of the companies that make "marketing services and support" payments to Merrill. The revenue sharing payments don't apply to advisory assets, and they enable the firm to provide support teams for advisors that help them align the fund companies' products to their client's goals.

"In brokerage accounts, Merrill only offers funds from fund families that pay Merrill marketing services and support fees," according to the mutual fund disclosure. "Further, mutual funds that would otherwise meet Merrill's criteria for inclusion on its product platform but whose principal underwriters, agents or sponsors do not agree to pay such marketing services and support fees will not be available for purchase in your brokerage account at Merrill, thereby limiting the available universe of mutual funds available to you. You should be aware that the amount of marketing services and support fees paid by the different mutual fund families varies, therefore Merrill receives more fees from some fund families than it receives from others. This results in a conflict of interest because it creates an incentive for Merrill to recommend that you invest in mutual funds from fund families that pay higher marketing services and support fees."

Names/numbers: Besides front-end sales charges, service fees and 12b-1 costs, Merrill gets "distribution, marketing services and support" payments from fund sponsors of up to 0.25% on "a portion" of the investments to the products and 0.10% annually on part of the overall assets in them. The company's non-specific listing of the fund firms paying revenue sharing in 2022 puts the sponsor families in categories based on the amounts, with BlackRock alone in the "greater than $40 million" grouping, followed by American Funds ($10 million-$19.99 million), Federated Hermes and Franklin Templeton ($5 million-$9.99 million) and 17 firms at between $1 million and $4.99 million).

Company response: Merrill spokeswoman Julia Ehrenfeld directed inquiries to the "marketing services & support" section on page 13 of the mutual fund disclosure document.

Osaic

Revenue sharing explanation: Osaic's disclosure page has links to information from the firm's broker-dealer brochure and an "indirect compensation" section of the firm's website about the firm's revenue-sharing relationships with more than 200 fund companies offering thousands of products to clients. The firm refers to the fund companies and other sponsors making revenue sharing payments as "strategic partners."

The firm is "paid more if you purchase a strategic partner product, and your financial professional indirectly benefits from strategic partner payments when the money is used to support costs of product review, marketing or training or for waiver of mutual fund ticket charges as described below," according to the compensation disclosures. "This conflict of interest is mitigated by the fact that [a] financial professional does not receive any additional compensation for selling strategic partner products, and that the firm maintains policies and procedures to ensure recommendations are in your best interest."

Names/numbers: The strategic partners pay up to 0.30% of purchases in mutual funds, with some providing added revenue to Osaic of up to 0.18% of assets per year. Alternatively, the firm receives a flat fee or the greater of the flat fee or an amount based on the assets or sales. In alphabetical order without specific amounts of revenue sharing payments, another company disclosure listed more than three dozen mutual fund companies that are strategic partners.

"These payments are designed to compensate the broker-dealer and/or Osaic for ongoing marketing and administration and education of its employees and representatives," the compensation disclosure said. "You do not make these payments. They are paid by the mutual fund and insurance companies and/or their affiliates out of the assets or earnings of the funds or insurance companies or their affiliates. From time to time, the Broker-Dealer and/or Osaic also receives revenue sharing payments from companies that are not Strategic Partners, generally to cover meeting expenses."

Company response: The company didn't respond to emails seeking comment.

JPMorgan Chase

Revenue sharing explanation: Three different disclosures respectively for clients of JPMorgan Private Client advisors in Chase branches, JPMorgan Wealth Management and JPMorgan Private Bank provide information on conflicts and compensation. A two-page JPMorgan Securities handout from August 2021 titled "Understanding Revenue Sharing" and another one that's a guide to mutual fund investing contain more concise disclosures about the conflicts.

The "revenue share payments from fund partners is not a factor in the decision of JPMS of what funds are included on the firm's approved or solicitation list," the handout said. "JPMS may allow representatives of its fund partners, including J.P. Morgan Asset Management, access to advisors for educational and promotional purposes, subject to conditions imposed by JPMS. Some funds allocate more resources for these purposes, which could cause advisors to become more familiar with those funds and focus on them when meeting with clients. Funds or their affiliates may pay for sales meetings, seminars and conferences JPMS holds in conducting its business, subject to conditions imposed by JPMS. The extent to which a fund is willing to pay for these activities is solely determined by the fund's advisers or affiliates, not by JPMS."

Names/numbers: JPMorgan Securities gets up to 0.25% of purchases in mutual funds and some added payments of as much as 0.09% of holdings each year in the products. Certain sponsors also make fixed payments of an extra $40,000 to $50,000 per year, according to the handout.

"JPMS receives revenue sharing payments from the following fund partners for marketing and support services: AllianceBernstein, American Century, American Funds, BlackRock, BNY Mellon, Calvert, Delaware Funds, Eaton Vance, Federated Hermes, Fidelity, Franklin Templeton, Hartford, Invesco, John Hancock, JPMorgan, MFS, Nuveen, Pacific Funds, PIMCO, Putnam, Transamerica and Wells Fargo," the document said.

Company response: Representatives for the company directed inquiries to its website.

Wells Fargo

Revenue sharing explanation: Wells Fargo discloses its revenue sharing to clients through language in a mutual fund investment guide and respective "Regulation Best Interest Disclosures" on its legal documents page for Wells Fargo Advisors and the Wells Fargo Advisors Financial Network.

"Revenue-Sharing fees are paid to us for providing continuing due diligence, training, operations, systems support and marketing to financial advisors and investors with respect to mutual fund complexes and their funds," according to the Reg BI brochures. "We receive revenue sharing from mutual fund complexes in connection with your account assets through arrangements we have with them. Revenue sharing is not passed on to financial advisors. Revenue-sharing fees are usually paid by the fund's investment advisor, or an affiliate, as a percentage of our aggregate value of client assets invested in the funds. In certain instances, revenue sharing is paid as a percentage of annual new sales to clients, or as a combination of a percentage of new sales and a percentage of aggregate client assets."

Names/numbers: Wells Fargo Advisors receives one-hundredth of 1% of new sales and up to 0.20% of total client assets in participating fund companies' products, with some asset management firms instead negotiating a fixed annual payment.

Company response: Wells Fargo spokeswoman Jackie Knolhoff directed inquiries to page 18 of the mutual fund investment guide issued by the firm.

Raymond James

Revenue sharing explanation: The Raymond James website has a section discussing the mutual fund investment process and a specific area listing its three tiers of "partner" mutual fund firms across 5,500 products from 350 companies available through its platforms. The firm's "Education & Marketing Support Program" designates participating mutual fund firms as "partners," "preferred partners" or "premier partners."

"The services provided to companies participating in the E&M Program include, but are not limited to, providing detailed mutual fund information to financial advisors, assisting mutual fund companies with strategic planning support, inclusion in the No Transaction Fee Program and providing opportunities for assisting with professional development workshops, study groups, and other educational events and conferences," according to the mutual fund page. "Premier mutual fund companies receive the greatest quantity of services, followed by Preferred and Partner, respectively.

Names/numbers: Raymond James gets up to 0.30% of mutual fund assets from the product sponsors annually, or a flat dollar fee or a combination of a specific amount and a percentage of holdings, according to the firm's guidance. The payments "are generally not disclosed in detail in a particular mutual fund's prospectus or [statement of additional information], according to the firm. The firm doesn't list the specific amounts that the fund companies pay, although it does list each of the dozens of "partners" by name.

The 14 "Premier" partners include American Funds, BlackRock, Franklin Templeton, Invesco, JPMorgan and T. Rowe Price.

Company response: The company didn't respond to emails seeking comment.