Under intense scrutiny and regulatory pressure, broker-dealers have jettisoned things like explicit fees for mutual fund distribution and front-end loads. These fees, often shared between fund platforms and brokers and dually registered advisors, created conflicts of interest that were costly to investors.

But these fee structures have been replaced with new types of revenue-sharing arrangements that are more opaque and difficult to pin down, according to a Morningstar report released this morning.

The independent investment research giant is calling on the Securities and Exchange Commission to start collecting data on these arrangements because of the hidden, potentially high costs being passed down to investors, according to the company’s report, “Regulation Best Interest Meets Opaque Practices.”

When the SEC’s Regulation Best Interest goes into effect next June, the industry will have to disclose and mitigate such conflicts of interests, said Aron Szapiro, director of policy research at Morningstar, in a conversation with Financial Advisor.

These deals can be found in many sectors of the financial services business. Based on Charles Schwab's disclosures, imany fund companies have revenue-sharing arrangements on the discount brokerages' platform, Schwab OneSource. These ongoing payments have generated complaints from many mutual fund companies.

How much is revenue-sharing costing investors if the advisor is motivated to choose one fund over another? “It’s difficult to know, and that’s part of the problem,” said Szapiro.

“These deals are being struck at the firm or platform level and are held tight to the vest. The money comes out of management fees and are not transparent,” Szapiro said.

New research shows that dually registered advisors are indeed inclined to put clients in underperforming funds that share revenue, Morningstar says. The study shows how that can hurt investors, and not just in the broker setting.

Even Morningstar has limited insight into how these payments are structured, the report said.

It’s hard to quantify because the revenue-sharing arrangements are poorly disclosed, said Lia Mitchell, a Morningstar researcher. “There is a wide range of ways revenue sharing is set up,” she said.

Another problem is that there is no standardized regulation for these fee-sharing structures and there’s a lack of disclosure and specification about how they work. “There is no standard way to explain what the payments are for,” Mitchell said. That makes them hard to compare, she added.

“So with Regulation Best Interest, we think it’s important the more we can get standardization the better,” Mitchell added.

The report states: “The narrative disclosures in Form ADV are difficult to systematically compare across fund sponsors. Broker disclosures will also be in different forms and in different locations.

Morningstar encourages “the standardization of such disclosures with specificity as to magnitude, circumstances warranting payment, and the exact split between the intermediary and the fund complex to inform investors and allow third parties to assess the effects of such payments on recommendations and investor performance,” the report said.

Although these payments can create a variety of conflicts and distort investment recommendations, the SEC has not historically regulated revenue sharing, which can spur fees of 25 to 75 basis points, Szapiro said.

While not all revenue-sharing payments create conflicts, “limited data impedes assessing which payments do and to what degree,” the report said. “Load sharing creates conflicts of interest when brokers have incentives to recommend one fund over another.”

Regulation Best Interest may force changes in revenue-sharing practices as brokers mitigate and disclose conflicts of interest.

“Brokers traditionally followed a suitability standard, which did not impose much scrutiny of revenue sharing. Regulation Best Interest strengthened the standard of conduct for brokers and is likely to affect revenue-sharing practices,” the report said.

Morningstar has sent the SEC a letter highlighting the different levels conflict that revenue-sharing can present in different mutual fund share classes.

“It seems to me from where I sit that the industry is taking this seriously and really looking at conflicts and looking at this program as a way to mitigate conflicts of interest,” Szapiro said.

The SEC is stepping up its game in the area. In August, the regulator charged Commonwealth Financial Network with revenue-sharing violations in a sobering first-ever enforcement the broker-dealer has vowed to fight.