1st Global Advisors, a Dallas, Texas, registered investment advisor acquired by Avantax in 2019, yesterday settled SEC allegations of breach of fiduciary duty for $16.873 million, according to an agency filing.
From January 2014 until roughly six months before its acquisition, 1st Global Advisors allegedly failed to disclose conflicts of interest that resulted in its affiliated broker-dealer, 1st Global Capital Corp., making more money off of mutual fund share classes, no-transaction fee revenue and sweep accounts than it otherwise probably would have made had the advisory clients been made aware of lower-cost options, the filing said.
That activity ground to a halt over the summer and fall of 2018, and the parent company, 1st Global, Inc., was acquired by Avantax in May 2019, according to the filing. In October of that year, 1st Global Advisors was merged into Avantax Advisory Services, and 1st Global Corp. was folded into Avantax Investment Services.
“We were aware of the SEC’s Share Class Disclosure Initiative prior to acquiring 1st Global and booked a reserve related to a portion of this matter when the acquisition was completed," wrote Todd Mackay, president of Avantax Wealth Management, in a statement. "While we are disappointed that the SEC demanded a penalty based on conduct that occurred prior to our ownership of 1st Global, we are nonetheless pleased to have worked closely with the SEC to resolve this matter.”
Avantax agreed to pay disgorgement of roughly $12.35 million, pre-judgement interest of $2.5 million, and a civil monetary penalty of $2 million, the SEC filing said.
According to the filing, since at least January 2014, 1st Global Advisors purchased for clients mutual fund share classes that charged 12b-1 fees, when lower-cost share classes of those same funds were readily available, and 1st Global Corp. was the recipient of the 12b-1 fees on those investments.
Similarly, the filing said, revenue sharing between the clearing broker and 1st Global Corp. from mutual fund expense ratios in the clearing broker’s no-transaction fee fund program created an incentive for 1st Global Advisors to make recommendations to clients to buy those funds, even when share classes of the same funds were available with lower annual expense ratios.
In addition, clients had access to three sweep account options. The most expensive, “Capital Reserves,” was the one 1st Global chose for its advisory clients, even though “Daily Money” was cheaper and “Retail” was free, the filing said.
At various points in 2018, 1st Global began converting all the funds in its advisory accounts to the lowest-cost option in these three categories, according to the SEC. Beginning in April 2018, the company started performing share class conversions away from 12b-1 fees to the lowest-cost option for mutual funds. In August 2018, the company starting converting all no-transaction fee funds to the lowest cost share class, and by September 2019 halted the revenue sharing payments on the no-transaction fee funds. And finally, In August 2018, the sweep accounts were also converted to the lowest-cost option, and all revenue-sharing on those funds stopped as of October 2019, the filing stated.