The Securities and Exchange Commission has charged Commonwealth Financial Network with failing to disclose material conflicts of interest related to revenue sharing and “breach” of fiduciary duty for failing to tell clients they could have invested in less-expensive share classes.
Commonwealth earned at least $100 million from the revenue-sharing agreement it had with clearing broker National Financial Services, an affiliate of Fidelity Investments, which Commonwealth required most of its advisors to use for trades since at least 2007, according to the SEC complaint.
“Commonwealth was paid to select and manage investments for its clients, but failed to tell its clients that some investment choices generated additional multi-million dollar revenues,” the SEC said in the complaint.
Under Commonwealth’s revenue-sharing agreement, the firm received a portion of the money that some mutual fund companies paid to NFS to trade on the platform, if the money was invested in certain fund share classes. Worth noting, the firm did not have a revenue-sharing agreeing for assets invested in Fidelity mutual funds, according to the SEC.
According to the SEC, in 2016 Commonwealth had approximately $174 million in client assets invested in the most expensive of the three share classes, resulting in approximately $515,000 in revenue-sharing payments to Commonwealth.
The Waltham, Mass.-based firm has $85 billion worth of advisory assets under management and offers investment advisory services through approximately 2,300 advisor reps and three Preferred Portfolio Services programs called PPS Custom, PPS Select and PPS Direct.
“The undisclosed conflicts of interest at issue in this case created incentives for Commonwealth to select and hold investments for advisory clients that financially benefited Commonwealth over the interests of its clients, including the incentive to select and hold investments that were more expensive for clients,” the regulator said.
Commonwealth reps had the choice of three different share classes with expense ratios ranging from 79 basis points that paid Commonwealth revenue sharing of 30 basis points, a share class charging 55 basis points that paid Commonwealth 8 basis points, and a share class charging 45 basis points that did not pay revenue sharing, according to the complaint.
“As an investment advisor, Commonwealth owes its advisory clients a fiduciary duty to act in its clients' best interests and to fully disclose all material facts about the advisory relationship, including disclosing any conflicts of interest that might cause Commonwealth to put its own interests before those of its clients,” the SEC said in its complaint.
Commonwealth spokeswoman Jacquelyn Marchand told Financial Advisor magazine that the firm denies the allegations.