New broker fees could raise costs for investors

Bob Moon Apr 6, 2012

Tess Vigeland: We talk a lot about how important it is to make sure you’re not paying high fees on your investments. Well that’s getting harder to do. Some brokerages are hiking the fees they get for selling particular mutual funds. And you may not even notice, because you don’t pay those fees directly. Now some consumer advocates call the payments “kickbacks” to brokers. And they say it can lead to a conflict of interest problem.

Our senior business correspondent Bob Moon explains.

Bob Moon: Over the years, big financial firms have carefully cultivated the image of their stock brokers as advisers you can trust to be on your side. In ads like this, for example.

TV commercial: My broker says, in the long run that kind of investment could be a good idea. What’s your broker say?

But when your broker talks, how carefully should you really listen? Is he truly a trusted adviser, or just a salesman hawking what will bring him the most money?

Under a system known as revenue sharing, mutual funds pay brokerages to sell their particular offerings, much like some grocery stores charge to place products on the most visible shelf space. One brokerage firm reports it makes as much as half its profit from these fees. John Freeman is a business ethics professor at the University of South Carolina.

John Freeman: What you have is brokerage firms deciding among thousands and thousands of mutual funds which ones they want to stock. Which, by a sheer coincidence, turn out to be the ones that pay the most money to the brokerage firm for stocking them.

Mercer Bullard is founder of Fund Democracy, an investor advocacy group.

Mercer Bullard: Problem is that your average consumer, when they’re getting personalized professional advice, expect that person is making recommendations solely in the clients’ best interest. But that is not the standard that applies to brokers.

Bullard says brokers continue to fight rules that would require them to act in the best interests of their customers, something certified financial advisers are already required to do. Brokerage firms argue the payments go to their bottom lines, not individual brokers, and so don’t affect an adviser’s judgment.

So how would you know if that’s even a possibility with your broker? Barbara Roper is an investor advocate for the Consumer Federation of America. She says the broker might tuck away a disclosure online.

Barbara Roper: It is a rare investor who’s going to go prospecting through the brokerage firm website to find this information.

But Mercer Bullard, who’s a law professor at the University of Mississippi, suggests you could pick up the phone.

Bullard: One way to protect yourself is always ask all compensation be disclosed.

Investor advocates say the Securities and Exchange Commission is still promising to make a new rule, aimed at bringing greater transparency to the financial relationship between mutual funds and brokers. It’s been in the works — for almost a decade now.

I’m Bob Moon for Marketplace Money.

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