Those types of hidden back-door payments are what the DOL fiduciary rule governing advisors and brokers who work with retirement investors were designed to eliminate.
There may be good reasons to use arrangements with revenue sharing or sub-TA fees, Szapiro said. For instance, some have argued that sub-TA fees can reduce the costs for accounting.
“We know that someone has to pay for the services the transfer agency provides. However, we believe that a clean-share structure that adds these payments from the mutual fund to a distributor—as opposed to a third party that has no relationship to the sellers of the fund—requires additional scrutiny to ensure investors are getting best-interest advice. Regulators should not assume that such arrangements eliminate conflicts of interest,” Szapiro explained in an analysis titled: “Why Clean Shares Matter: What we’ve told federal regulators about 'clean' mutual fund shares.”
Szapiro said the industry’s move to minimize conflicts of interest by developing clean shares shows great promise, but that it is still early in the game.
Clean shares have the potential to benefit investors by removing perverse incentives for financial advisors that sell the funds to enrich themselves rather than their clients, he added.
“By forcing mutual funds to compete on merit as advisors recommend lower-cost, higher-returning funds rather than funds that are most lucrative for the advisor, clean shares could dramatically improve investors' experiences and their outcomes. With clean shares, investors will know exactly what they are getting for the fees to help them evaluate whether they are getting a fair value from their financial advisor. Over the last three decades, we have never seen as big a change in industry practice,” he said.
Still, it’s clear that regulators need to proceed with caution and scrutiny, the analyst said.
“Opaque fees and conflicts of interest can hurt investors’ progress toward their goals,” Szapiro concluded.
Morningstar's guidelines on clean share classes, which they’ve shared with regulators, state that advisors should charge investors directly for advice and that truly “clean” shares should only include fees that go directly from investor to asset manager (without any additional payments that flow from the asset management back to the advisor or distributor).
“Conflicted 'back-door' payments exist whenever money flows from the asset manager to the advisor/distributor, especially if the relationship between the advisor and asset manager is obscured,” Morningstar’s guidelines state.