What is Mutual Fund Revenue Sharing?

By Financial Advisor Hans Smith

When glancing over your financial portfolio, you may discover a number of investment products that perhaps you are unfamiliar with. Do you ever wonder why your advisor has placed you in certain investments? Or contemplate why your retirement plan sponsor offers a specific, limited menu of investment options? It might be worth asking if it has to do with something called mutual fund revenue sharing.

Here is how mutual fund revenue sharing works:

The first concept to understand is that every mutual fund has a specific expense ratio. The expense ratio tells you how much of the fund’s assets go towards a variety of expenses that you, the investor, will ultimately pay. Put another way, the published expense ratio lets an investor know the annual cost they will pay to invest in a specific mutual fund, and how much their investment returns will be reduced. The mutual fund expense ratio is separate and distinct from any applicable investment advisory fees that you would also be subject to if you work with a financial advisor.

Financial advisors often place certain mutual funds with elevated expense ratios in client accounts. The reason for this is often simple: this practice can generate additional revenue for the advisor and their firms through what is known as “mutual fund revenue sharing.”

As an example, let’s say company XYZ creates a mutual fund and charges a 1.00% annual expense ratio to invest in the fund. The folks at XYZ then go out and form partnerships with a variety of financial advisors from around the country. Once a formal revenue sharing agreement is in place, a portion of that 1.00% expense ratio can then be "shared" between the financial advisor that recommends XYZ Mutual Fund and XYZ mutual fund company itself. This is a clear conflict of interest, and creates incentives for financial advisors to recommend mutual funds produced by companies with whom they have revenue sharing agreements.

In my view, mutual fund revenue sharing is a convenient way to mask fees to the client. Money quietly changes hands, few clients understand what they are paying in total costs, and the additional fee is not something a client is going to see listed on account statements.

Our values at One Day In July are transparency, trust, and acting in the best interest of our clients. For those reasons, we do not participate in mutual fund revenue sharing, and our advisory costs are simple and clear. We are 100% fiduciaries on all accounts, and create portfolios with only our clients’ best interest in mind. That means we have no incentives to use one set of investments over the other, and are not paid “on the back end” by certain mutual fund companies to use their products.

When it comes to investing, if you aren’t familiar with what you're paying, there's a good chance you're paying too much.

**Investment advisors are required to disclose their various revenue sharing agreements, and I've provided some examples here:

Edward Jones disclosures
Morgan Stanley disclosures
Merrill disclosures
Fidelity disclosures
Ameriprise disclosures

"Edward Jones" is a registered trademark of Edward Jones Investments, "Morgan Stanley" is a registered trademark of Morgan Stanley, "Merrill" is registered trademark of Bank of America Corporation, "Fidelity" is a registered trademark of FMR LLC, "Ameriprise" is a registered trademark of Ameriprise Financial LLC.