On Monday, the Securities and Exchange Commission announced that 79 investment advisory firms have agreed to pay back $125 million to clients because they failed to properly disclose they were steering them into more expensive mutual funds than necessary. Wells Fargo, Raymond James, Robert W. Baird, Oppenheimer, Deutsche Bank, and other well-known firms were on the list.
The firms avoided paying a penalty because they reported their own misconduct and are refunding the fees. Self-reporting is part of a current SEC policy to encourage cooperation in the hope that it will streamline investigations when budgetary resources are scarce. Some consumer advocacy groups do not approve—they feel it doesn’t send a very strong message about deterrence.
The misconduct came about because of the use of 12b-1 fees—annual charges that are primarily used to pay commissions to a brokerage firm’s salespeople. Because these fees are included in the operating costs of mutual funds, they drive up the annual cost of the shares.
In an era where no-load mutual funds abound, including very inexpensive index funds, there is rarely any advantage to clients for owning shares that include marketing fees. Conlon Dart has always stayed as far away as possible from funds that charge unnecessary fees.
If you would like to read a little more about the subject, check out this Wall Street Journal article about the fund fee settlement. If you don’t have a Journal subscription, here’s another article about the fees. And if you’re really interested, Investopedia has a primer on 12-b1 fees.