Asked how the industry practice of revenue sharing served their clients’ best interest, nine of the largest wealth management firms dodged the question.
Instead — as shown in the below slideshow — the representatives for Ameriprise, LPL Financial, UBS, Morgan Stanley, Edward Jones, Merrill, JPMorgan Chase, Wells Fargo and Raymond James either referred Financial Planning to their companies’ disclosures, declined to comment or didn’t answer the email inquiry. That was hardly surprising, considering that revenue sharing and other industry conflicts of interest frequently draw regulatory scrutiny.
But even officials at the Securities and Exchange Commission — the regulatory agency responsible for overseeing Wall Street and ensuring that conflicts of interest like revenue sharing are properly disclosed and managed across the industry — declined to comment, too.
So FP turned to knowledgeable experts to explain revenue sharing, in which mutual fund companies make payments to wealth management firms that recommend their products. The practice creates conflict of interest, as wealth firms and their financial advisors may be incentivized to nudge clients toward funds that pay the most revenue sharing over funds that may be a better fit for the client.
READ MORE: The lucrative, murky revenue sharing between fund and wealth managers
The practice began decades ago, when asset management firms were seeking space on the investment menus offered by independent advisors to their clients, according to Mark Quinn, director of regulatory affairs with Los Angeles-based Cetera Financial Group. The separation of the product issuers from their distribution channels in the form of independent wealth managers created a need “to fill in that revenue gap” and “get additional market share,” Quinn said.
Today, the payments work differently than in the past.
“The top tier of sponsors, they all pay the same,” Quinn said. “The potential conflict that could have arisen out of one sponsor paying more than another, that doesn’t really exist in the way that it would have 15 or 20 years ago.”
Regardless, the total scope of revenue sharing across the industry remains difficult, if not impossible, to determine. Some say it should be banned completely.
“Investors shouldn’t need to be a financial expert to save for retirement any more than they should need to be an aerospace engineer to choose a safe flight,” Corey Frayer, the director of investor protection with the Consumer Federation of America, said in an email. “The financial sector is consistently more profitable than any other but it never seems to be enough. Disclosure is a critical feature of price discovery because it provides a like-for-like comparison among similar financial instruments but it’s not as effective a tool for comparing complex and bespoke arrangements like revenue sharing agreements.”
Many unknowns remain about revenue sharing, including its total amount, how exactly it differs from other types of payments between product issuers and wealth firms, and whether regulators will ever ban it.
With all that murkiness, planners should simply strive to inform themselves and their clients as much as possible about revenue sharing and other conflicts, according to Sara Grillo, an advisor lead generation consultant who teamed up with planners in launching a professional network called the Transparent Advisor Movement in 2022. Grillo said some advisors and industry professionals may be afraid to discuss the topic at all.
“Being a better financial advisor comes down to things like this — doing the things that you’re scared about,” Grillo said. “You can only be better by having these dialogues.”
Scroll down the slideshow for a glimpse into the disclosures about revenue sharing at nine of the largest firms in wealth management. Click here to read FP’s accompanying deep-dive feature on revenue sharing, “The lucrative, murky revenue sharing between fund and wealth managers.” And follow this link to compare the disclosures below to those of the same companies from two years ago.
