It’s a little-know fact that the SEC allows mutual funds to spend a portion of investor assets on marketing and distribution. Wall Street’s self-regulator, FINRA, limits that spending to a whopping 0.75% of a fund’s average net assets a year.
Currently, the SEC is investigating mutual-fund companies’ techniques for tapping the assets they manage for investors to skirt rules limiting those payments, according to an article in today’s Wall Street Journal. “The SEC’s concern is that those additional fees aren’t disclosed properly to investors, and that brokers may be more likely to recommend funds that pay for such services, the people said.”
Hello! Is this breaking news? “It creates the notion of pay to play,” says Bing Waldert, a director at research firm Cerulli Associates. “Funds are recommended to investors not fully on the merit of quality of product, but also because they pay for it.”
But, the article goes on to report that “Fund companies could in theory get around those limits by classifying the payments as another type of allowable fee for record-keeping services, said people familiar with the SEC’s inquiry. The SEC’s inquiry centers on whether mutual funds are appropriately disclosing those additional costs, these people said.”
In other words, the SEC has no problem with mutual funds charging shareholders for marketing fees exceeding a whopping .75%, just so long as they are properly disclosed in the tiny fine print no ordinary retail investor ever reads – or can even find in those thick mutual fund prospectuses written in indecipherable legal jargon.
At the Conservatory we do read the fine print before choosing funds for our members’ portfolios, and because we have access to funds not promoted by brokerage firms (many of which are not even available to retail investors), we are able to identify and select the lowest-cost funds in their category that meet our standards.
Source: SEC Cranks Up Investigation Into Fun Firms’ Fees” (Wall Street Journal, Friday, July 17, 2015).