Investors Should Watch Out for Revenue-Sharing Agreements
When shopping for investments, you want to choose from the best options possible, but behind-the-scenes deals could be limiting your choices and driving up your costs.


Ever notice how when you go to the grocery store, you’re more likely to choose the cereal or frozen pizza that’s displayed at eye level?
It would be nice to think the store employees had you and your neighbors in mind when they placed those products — that they knew their customers preferred particular items, so they put them where they’d be easiest to grab and go.
But that’s not how it works — at least not at a lot of major grocery chains. Many charge manufacturers a fee for shelf space — and more for those prime spots. It isn’t about what’s best for the customer, although sometimes it works out that way. It’s about making money.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Most consumers probably aren’t aware of those fees, or don’t think much about them. It affects them, though, if prices go up on the products they want — or if they can’t access a product at all.
It’s similar to what happens in the financial industry when you buy a mutual fund.
Mutual Funds Sometimes Pay to Play
There are thousands of mutual funds — an overwhelming number of options. Depending on whom you talk with about making your investment, your choices may be limited.
Just like that prime shelf space at the grocery store, sometimes the mutual fund companies paying the highest fees to brokerage firms get better visibility. Many of these companies pay to get their name at the top of the list of what’s being recommended to clients. Investors might not know about other products that could be a better fit.
Representatives for brokerages, who are often compensated by commission, usually are required to fulfill only a suitability standard when choosing products for a client. They must have a reasonable belief that the recommendations they make are suitable regarding the client’s financial needs and objectives, but their first duty is to the company they work for, not necessarily the clients they’re serving.
How Revenue-Sharing Agreements Work
There are plenty of mutual fund companies out there that try to incentivize brokerage firms to sell their products — especially the larger companies — by offering revenue-sharing agreements. Those firms then urge their employees to focus on those funds.
Revenue sharing can take several forms. Some mutual fund companies will charge additional fees titled 12b-1 fees. These fees can cover a variety of services, including costs for record-keeping, accounting and technology, but they can also serve as a compensation incentive for advisers to pick one fund over another. These fees can be up to 25 basis points annually (a basis point is one one-hundredth of a percentage point). A $100,000 account, for example, would be charged an additional $250 annually on top of an adviser’s management fee and other fund expenses. Other examples of revenue sharing agreements could induce biased recommendations for an adviser to use one money manager over another, regardless of performance or expenses, due to monetary incentives for an adviser.
You can see the draw for the brokerage’s representative, whose job is to sell. It’s easy to get into the mindset of pushing products that earn higher compensation and the boss’s approval.
2 Ways Consumers Can Protect Themselves
I think it’s important to work with companies that do not allow any type of revenue sharing. The sad thing is that many of the big companies do, and most investors are totally unaware of these arrangements.
Ask your financial professional about revenue-sharing agreements and other incentives he or she might receive, as well as how they affect the options you’re being offered and the fees you’re paying. (If he or she talks more about products than your long-range plan, that’s a red flag.)
Also, consider whether working with an Investment Adviser Representative would be the best choice for you going forward. An IAR is held to a fiduciary standard and is prohibited from buying a mutual fund or other investment just because it would result in a higher fee or commission.
Working with an Investment Adviser Representative won’t necessarily protect you from getting bad or biased advice, but it is a deterrent, and it will give you some legal recourse if you feel as though your money has been criminally mishandled.
Kim Franke-Folstad contributed to this article.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Anthony Pellegrino is one of the founders of Goldstone Financial Group (www.GoldstoneFinancialGroup.com), an SEC Registered Investment Adviser. He is a fiduciary and holds a Series 65 securities license and an Illinois Department of Insurance license. Anthony co-hosts the "Securing Your Financial Future™" television show airing on CBS Sunday mornings following "Face the Nation."
-
Silver Airways Shutdown Leaves Travelers Stranded — Here’s What to Know
The Florida-based airline abruptly ceased operations, disrupting routes across the Southeast and Caribbean. What frequent flyers need to know about refunds, rebooking and future travel plans.
-
Stock Market Today: Stocks Rise as Treasury Yields Drop
A round of not-too-terrible economic data helped boost the bond market Thursday.
-
A Financial Adviser's Defense of Annuities: They're Just Misunderstood
Annuities can offer retirement income stability and security against market volatility, though some do have drawbacks. The key is to understand their features before buying.
-
Diversification: An Investment Adviser's Guide to Why You Need It and How to Achieve It
How confident are you that your money will go the distance? Building a balanced portfolio can shore up your investments' long-term stability.
-
How My Dad Taught Me the Compounding Returns of Fatherhood
As Father's Day approaches, I remember how my father's small acts of love and generosity added up over time and influenced my relationships with my own children, proving that the best investments can grow across generations.
-
Financial Professional's Key to Peace of Mind in Retirement: Income Planning
Creating guaranteed income sources in retirement will help you truly enjoy your golden years and spend less time worrying about money.
-
Don't Let a Market Crash Crush Your Retirement
It's a comfort to know that with the right strategies, you can weather just about anything a crazy stock market can throw at you.
-
Wealth Advisers: In Estate Planning, the End Is Just the Beginning
We need to keep the lines of communication with our clients open so that we can anticipate and help them navigate issues that arise over time.
-
Stood Up by a Radio Show: But Was It a Breach of Contract?
A conscientious financial planner reschedules his clients after being invited onto a talk show and ends up losing one of them at a cost of $5,000. What does the radio show owe him, if anything?
-
Eight Estate Planning Steps to Protect Your Loved Ones (and Your Legacy)
Two-thirds of Americans don't have an estate plan. If you're one of them, these are the essential steps to take now to prevent problems for your family later.