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.

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