New point-of-sale fee disclosure rules under the ERISA Section 408(b)(2), set to take place this summer, are making it more difficult for wirehouses to raise the fees they charge investors. Their solution? Raise the fees (or at least their “cut”) on the mutual fund companies with which they do business.
Wirehouses typically charge for the privilege of investing their clients’ money as part of a revenue sharing agreement with mutual fund companies; usually a percentage of every dollar invested by a wirehouse client in the fund. The arrangement, while perfectly legal, is akin to gaining “shelf space” in a supermarket grocery store.
As The Wall Street Journal notes, starting Jan. 1, UBS (UBS) “roughly doubled the rate it asks mutual funds to pay, seeking as much as $15 for every new $10,000 invested by a UBS client and up to $20 a year going forward. Morgan Stanley Smith Barney (MS) also recently raised its rates to $16 a year, from the $13 it previously charged for stock funds and the $10 it charged for bond funds.”
For advisors and clients who believe wirehouses have an inherent conflict of interest due to such arrangements, news of the fee increases will do little to assuage their suspicion. Whether or not the fee increases will eventually be passed along to investors is also an area of concern.
Wirehouses counter that that since the payments go to brokerages rather than to individual financial advisers—who receive separate payment streams—they don’t affect advisers’ judgment in picking funds, according to the paper.