Revenue Sharing in Wealth Management Continues Despite Criticism
From the desk of Jim Eccleston at Eccleston Law
Revenue sharing remains one of the wealth management industry’s most controversial and opaque practices. According to Financial Planning, despite decades of scrutiny and regulatory guidance, billions of dollars continue to move between fund managers and financial firms through these arrangements, creating ongoing conflicts of interest for financial professionals recommending investment products.
At its core, revenue sharing involves payments from mutual fund managers to wealth management firms for recommending their funds. Financial Planning reports that this practice incentivizes firms to steer clients toward products that provide these payments, even when comparable, lower-cost options exist. While Regulation Best Interest (Reg BI) and fiduciary duties for retirement accounts aim to protect investors, enforcement efforts haven’t fully addressed the risks posed by revenue sharing, especially because these payments fall outside of a fund’s stated expense ratio.
A recent U.S. Government Accountability Office (GAO) study highlighted how elusive this issue remains. Undercover researchers posing as potential clients approached 55 financial professionals to ask about industry conflicts of interest. While many either denied conflicts existed or gave vague answers, one advisor candidly acknowledged the problem, describing commission-driven advisors and revenue-sharing arrangements that place firm profits ahead of clients’ best interests.
Although regulators have cracked down on related practices like 12b-1 marketing and distribution fees, revenue sharing persists with less oversight. Only a handful of major firms publicly disclose exact revenue-sharing figures, while others offer limited, generic disclosures that leave investors guessing. Financial Planning reports that available figures suggest industry-wide payments likely reach several billion dollars each year.
The SEC has flagged revenue sharing as a significant conflict in multiple bulletins but has stopped short of prohibiting it. In one high-profile case, the SEC alleged that Commonwealth Financial Network failed to adequately disclose revenue-sharing conflicts tied to higher-cost mutual fund share classes. A federal judge initially ordered Commonwealth to pay $93 million in disgorgement and penalties. The case was later overturned on appeal and remanded for possible trial, leaving open questions about the future enforcement landscape for similar practices.
Industry experts like Morningstar’s Lia Mitchell note that while some of the most conflicted revenue-sharing models are declining, investor confusion persists. Revenue sharing can obscure the true cost of investment advice and undermine confidence in financial advisors’ objectivity. Calls for greater transparency and tougher enforcement continue, as both regulators and firms grapple with balancing business incentives and fiduciary obligations.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
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