The Coalition of Mutual Fund Investors (CMFI) has documented several practices being used by large broker-dealers to increase their revenues from mutual fund activities. CMFI estimates that these practices impose annual costs on individual investors of as much as: (1) $2.2 billion in account maintenance charges; (2) $4.18 billion in shareholder servicing payments; and (3) $2.09 billion in revenue-sharing payments.
Investors who are using mutual funds to save for their retirement, or to send their children to college, are seeing their assets and investment earnings depleted by these broker-dealer costs. And, ironically, a number of these large broker-dealer intermediaries were recipients of bailout money from the Federal government's Troubled Asset Relief Program (TARP).
As the primary distributors of fund shares, large broker-dealers have substantial leverage over mutual funds. These broker-dealers are using this leverage to convert individual mutual fund accounts onto the "street name" accounting platforms operated by brokerage firms. This conversion allows certain mutual fund shareholder accounts to reside only on the books of broker-dealers, creating an opportunity for brokerage firms to charge significant fees to mutual funds and their individual investors, in addition to the fees already being charged for sales and distribution. These fees are established without competitive bidding processes, and, as a result, are higher than the fees for similar services set through normal market forces.
CMFI believes that this conversion of mutual fund accounts onto the accounting platforms of broker-dealers has been increasing steadily over the past decade, and will continue to increase as brokerage firms seek additional sources of revenue and as they emerge from the recent financial crisis.
The fees charged by broker-dealers for maintaining shareholder accounts are primarily paid by mutual funds as an expense from fund assets, thereby imposing costs on shareholders who have no customer relationship with these brokerage firms. These fees are also paid for account maintenance and shareholder servicing activities which, under existing regulatory rules, are already the responsibility of broker-dealers to perform for their customers.
Additionally, these fees are being paid despite the fact that securities issuers do not normally pay broker-dealers to hold positions in individual accounts for other types of investments. For example, broker-dealers are not paid to hold equity securities, municipal or corporate bonds, or exchange-traded funds (ETFs) in a brokerage account. These positions are tracked by broker-dealers in their accounting systems as a part of the services they are required to perform for customers, typically at no charge to the account holder.
Remarkably, the payment of these fees to broker-dealers is not creating additional protections for individual investors. In fact, the opposite is taking place, as trading activities and investor identities within these broker-controlled shareholder accounts remain hidden from mutual fund compliance personnel attempting to apply prospectus policies and procedures in a uniform and consistent manner across shareholder classes.