How To Find Conflict Of Interest Fees In A Mutual Fund Prospectus
You may have known of it as the “Fiduciary” Rule, but the technical name for the Department of Labor’s attempt to discourage conflicted fees was the “Conflict of Interest” Rule.
“Fiduciary” received all the press, and that’s too bad. Most folks can’t tell the difference between a fiduciary and a hole in the wall.
Now, “conflict of interest”? That’s a whole ’nother kettle of fish. The phrase explains itself. It’s difficult to miss its meaning. The only questions are “Whose interests are conflicted?” and “Under what conditions does a conflict exist?”
That’s what the Department of Labor tried to define. It’s a pretty big deal in the financial world. Some studies suggest conflict of interest fees cost retirement investors $1 billion a month. While the court vacated the DOL’s Conflict of Interest Rule, investors don’t have to worry. They can still look out for themselves.
It’s important to have some understanding of what constitutes a conflict of interest fee. There remains some debate on this, so it’s best to keep the answer simple, although that’s not as painless as you might like.
First, it depends on the situation. A commission charged by a broker for a trade you place is generally not considered a conflict of interest fee. On the other hand, a similar transaction fee charged by a Registered Investment Adviser is likely to be considered a prohibited transaction; thus, it would be an example of a conflict of interest fee.
The difference between these two situations comes down to the difference between a sales rep and an advisor. This, by the way, is where the whole “fiduciary” thing comes in. An advisor is generally considered a fiduciary, meaning an advisor must always act in your best interest. Except in the case where the “advisor” is not a Registered Investment Adviser but merely a sales agent taking your order, in which case, since said sales agent is only following your instructions and you have your own best interest in mind, the sales agent is under no obligation to insure your order is actually in your best interest because, well, the sales agent is just following orders.
See how confusing this can get?
By isolating your definition strictly to circumstances involving advice, you can quickly determine if a conflict of interest fee is present by looking at your mutual fund prospectus. Remember, this doesn’t work if you make the decision to buy the mutual fund. The possibility of a conflict of interest fee exists only when an advisor advises you to buy the fund. If the advisor receives payment from the fund, it’s likely a conflict of interest fee exists.
Fortunately, the SEC has made it easy for you to effortlessly find (most, but not all) conflict of interest fees. All you need to do is open up the prospectus of your mutual fund to its very first pages. Immediately after the cover page, usually on page 2, sometimes on page 3, you’ll find a table labeled “Fees and Expenses of the Fund.”
The table is broken down into two categories: Shareholder Fees and Annual Fund Operating Expenses. The SEC requires all mutual funds to list (nearly) all fees within this table. This is where you will find conflict of interest fees.
Remember, a conflict of interest fee requires the person who advises you to buy the fund to then receive payment from the fund. Here’s the complete list of fees the SEC requires every mutual fund to delineate in their prospectus in the order they are required to list them. If there’s a “√” to the left of the fee, it may qualify as a conflict of interest fee. If there’s no “√” to the left of the fee, it does not qualify as a conflict of interest fee.
Fees and Expenses of the Fund
Shareholder Fees (fees paid directly from your investment)
√ Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) __%
√ Maximum Deferred Sales Charge (Load) (as a percentage of ) __%
√ Maximum Sales Charge (Load) Imposed on Reinvested Dividends [and other __% Distributions] (as a percentage of ________)
Redemption Fee (as a percentage of amount redeemed) __%
Exchange Fee __%
Maximum Account Fee __%
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
Management Fees __%
√ Distribution [and/or Service] (12b-1) Fees
The SEC does not require a fund to list any of these fees should they not apply to the fund. Funds need only list those fees they actually charge.
If your fund contains fees from any of the lines with a “√” in the front, you may be paying conflict of interest fees.
Not that there’s anything wrong with that.
Ironically, the DOL’s Conflict of Interest Rule didn’t outlaw conflict of interest fees. It only required they be clearly disclosed. Armed with this disclosure, you could then decide if you wanted to pay them or only use funds without conflict of interest fees.
The SEC prospectus requirements contain this disclosure.
The choice is yours.