Are you sure your financial adviser is recommending the best, lowest-cost mutual funds for you and not just the ones for which he/she gets extra compensation? Recently, the Securities and Exchange Commission (SEC) announced that 79 investment-advisory firms including Oppenheimer & Co., TIAA-CREF and Wells Fargo Advisors agreed to return a total of $125 million to thousands of clients for having steered them to funds that were more costly than they needed to be.
The firms failed to adequately disclose the conflicts of interest resulting from that extra compensation in the form of 12b-1 fees, the SEC said. Versions of the same funds without those fees were available to the investors. These marketing/distribution fees typically add 0.25% (or up to 0.75%) to the expense ratio that an investor pays annually.
Recommending a class of fund shares with 12b-1 fees isn’t illegal. But as a so-called fiduciary, any adviser registered with the SEC is required to describe all fees for funds that an investor is considering, including how the fees affect each fund’s performance and compensation for the investment advisers.
Self-defense: Consider working only with financial advisers who are paid directly by clients, either on an hourly basis or as a percentage of assets managed. (You can find such fee-only advisers at the National Association of Personal Financial Advisers website, NAPFA.org.) But if you do work with an adviser who is compensated for selling particular investments, ask before investing whether there is a 12b-1 fee or any other extra compensation that poses a conflict of interest. Instruct the adviser that you always want the fund’s cheapest share class available. If you already own fund shares with 12b-1 fees, ask your adviser about converting to lower-cost shares. Many mutual fund providers offer these conversions without triggering capital-gains tax. For more information on the SEC settlement, go to SEC.gov/news/press-release/2019-28.