Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Labor Department investigating Fidelity over hidden mutual fund fees--WSJ
Government Probes Fidelity Over Obscure Mutual-Fund Fees Boston-based firm characterizes so-called infrastructure fee as solution to ‘broken’ business model
Good find. Unfortunately I’m not qualified to address it. Many here are highly qualified and might comment now that I’ve plucked your query out of the somewhat obscure section here I affectionally call the bone yard.
Will say that fees are deadly to profits and come out out of the investor’s pocket one way or another. This sounds to me like a legal spat over whether disclosure is required of the fees a fiduciary (ie mutual fund house) pays to a brokerage or other platform that than distributes the purchased shares to investors. (I stand to be corrected on this point!)
My limited interest is that I don’t buy and sell thru brokerages but have always invested directly with a few different fund houses. I’m always unhappy to see that shares in a fund I own directly thru the fund house are being peddled for “no fee” by Schwab, Fidelity or some other broker. I know that to some extent that “no fee” transaction others are receiving is coming out of my pocket by promotional fees my house or fund is paying the distributor for marketing.
There was another issue a decade or more back when funds that sell short weren’t displaying as part of the ER the interest they were paying on money borrowed to fund the short sales. Eventually that got settled in favor of full disclosure and the published fee schedules for funds that short the markets rocketed higher. My guess is that this will also be settled in favor of fuller disclosure.
While the WSJ which you linked and FT have stories, it’s hard for some of us to read them. So, I’m linking an article on the issue that’s easier to read (no pay wall).
Thanks to both of you for your input. I was debating yesterday whether to post the WSJ article, but decided not to because of the paywall, and the entire story was far too detailed to summarize in a quick excerpt / recap. Here's a few choice excerpts from the WSJ article:
"When a fund pays a fee that aims to result in the sale of fund shares, either directly or indirectly, securities laws require it to be part of what is known as a 12b-1 plan and to be disclosed to investors."
"In the internal Fidelity document, the company indicates that it doesn’t consider the infrastructure fee to cover distribution services. Rather, it categorizes the agreement between Fidelity and funds on its platform as “shareholder services”; such fees may not require a 12b-1 plan."
Sleaze in the financial markets, as usual. No, no... not a "distribution fee"... it's a "shareholder service" fee.
"The fee is calculated as 0.15% of a mutual-fund company’s industrywide assets, not just on the dollar amount of assets held by Fidelity customers buying shares on the platform, the document says."
This is the kicker -- .15% of a hosted fund company's ENTIRE industrywide assets? So if they are offering XYZ's S&P 500 fund only, XYZ is paying Fido a fee that's based on not only the AUM of that fund but also the AUM of every other fund XYZ sells, even if it's not available on the Fido platform? And does that include retirement plans, SEP accounts, or other managed accounts? Wow .. that's chutzpah!
This sounds like an end-run around declaring a 12(b)-1 fee -- or a 12(b)-1 that's higher than the average for services that are supposed to be paid for from a stated 12(b)-1 fee. TL;DR Typical greed/sleaze move!!
Thanks @rforno and Old_Joe for adding some needed clarity. Another puzzle for me is why the Labor Department is investigating? I’ll assume it’s because of the workplace environment in which 401-K products are marketed. Still, it seems to me this is something the SEC would normally take the lead in.
One guess: (merits of case notwithstanding) - this might be more of “an axe to grind” (politically motivated) case. Like I said - a guess. But this admin. is not above such tactics. I’m thinking specifically of previous threats to raise US postal rates for Amazon. Also, more recent threats to investigate a potential government criminal witness’ father-in-law.
IIRC Labor Dept has jurisdiction over policies governing employee retirement plans like 401Ks...think of the controversial 'fiduciary duty' rule & fees from the Obama DOL that Wall Street *hated*.
By contrast SEC has jurisdiction over what goes in these accounts (ie, investment vehicles like mutual funds, etc)
Thanks @rforno and Old_Joe for adding some needed clarity. Another puzzle for me is why the Labor Department is investigating? I’ll assume it’s because of the workplace environment in which 401-K products are marketed. Still, it seems to me this is something the SEC would normally take the lead in.
One guess: (merits of case notwithstanding) - this might be more of “an axe to grind” (politically motivated) case. Like I said - a guess. But this admin. is not above such tactics. I’m thinking specifically of previous threats to raise US postal rates for Amazon. Also, more recent threats to investigate a potential government criminal witness’ father.
You are correct. I had assumed the disclosure issue related to the fund Prospectus and applied to all investors who might buy the fund. A second reading made it clearer. It’s some type of hidden administration fee targeted at the 401 K participants. However, were the issue instead related to the actual funds and their fees as stated in the fund prospectuses, than I think the SEC would still have jurisdiction.
“The U.S. Securities and Exchange Commission administers and enforces the federal laws that govern the sale and trading of stocks, bonds, mutual funds, and other securities. The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has oversight of 401(k), pension and retirement plans.”:https://www.sec.gov/complaint/401k.htm
"As we went to press, The Wall St. Journal is reporting that an“obscure fee” charged by Fidelity to third-party fund companies for the right to distribute their offerings on Fidelity’s Funds Network platform, has caught the attention of federal regulators. Of central concern is whether a purported fee of 0.15% is being absorbed by the fund companies themselves, or if it’s being passed to fund shareholders in the form of higher, undisclosed fees. Note: This matter does not affect Fidelity funds. "
"As we went to press, The Wall St. Journal is reporting that an“obscure fee” charged by Fidelity to third-party fund companies for the right to distribute their offerings on Fidelity’s Funds Network platform, has caught the attention of federal regulators. Of central concern is whether a purported fee of 0.15% is being absorbed by the fund companies themselves, or if it’s being passed to fund shareholders in the form of higher, undisclosed fees. Note: This matter does not affect Fidelity funds. "
Comments
Good find. Unfortunately I’m not qualified to address it. Many here are highly qualified and might comment now that I’ve plucked your query out of the somewhat obscure section here I affectionally call the bone yard.
Will say that fees are deadly to profits and come out out of the investor’s pocket one way or another. This sounds to me like a legal spat over whether disclosure is required of the fees a fiduciary (ie mutual fund house) pays to a brokerage or other platform that than distributes the purchased shares to investors. (I stand to be corrected on this point!)
My limited interest is that I don’t buy and sell thru brokerages but have always invested directly with a few different fund houses. I’m always unhappy to see that shares in a fund I own directly thru the fund house are being peddled for “no fee” by Schwab, Fidelity or some other broker. I know that to some extent that “no fee” transaction others are receiving is coming out of my pocket by promotional fees my house or fund is paying the distributor for marketing.
There was another issue a decade or more back when funds that sell short weren’t displaying as part of the ER the interest they were paying on money borrowed to fund the short sales. Eventually that got settled in favor of full disclosure and the published fee schedules for funds that short the markets rocketed higher. My guess is that this will also be settled in favor of fuller disclosure.
While the WSJ which you linked and FT have stories, it’s hard for some of us to read them. So, I’m linking an article on the issue that’s easier to read (no pay wall).
http://fortune.com/2019/02/27/fidelity-fees-labor-department/
"When a fund pays a fee that aims to result in the sale of fund shares, either directly or indirectly, securities laws require it to be part of what is known as a 12b-1 plan and to be disclosed to investors."
"In the internal Fidelity document, the company indicates that it doesn’t consider the infrastructure fee to cover distribution services. Rather, it categorizes the agreement between Fidelity and funds on its platform as “shareholder services”; such fees may not require a 12b-1 plan."
Sleaze in the financial markets, as usual. No, no... not a "distribution fee"... it's a "shareholder service" fee.
Right.
"The fee is calculated as 0.15% of a mutual-fund company’s industrywide assets, not just on the dollar amount of assets held by Fidelity customers buying shares on the platform, the document says."
This is the kicker -- .15% of a hosted fund company's ENTIRE industrywide assets? So if they are offering XYZ's S&P 500 fund only, XYZ is paying Fido a fee that's based on not only the AUM of that fund but also the AUM of every other fund XYZ sells, even if it's not available on the Fido platform? And does that include retirement plans, SEP accounts, or other managed accounts? Wow .. that's chutzpah!
This sounds like an end-run around declaring a 12(b)-1 fee -- or a 12(b)-1 that's higher than the average for services that are supposed to be paid for from a stated 12(b)-1 fee. TL;DR Typical greed/sleaze move!!
One guess: (merits of case notwithstanding) - this might be more of “an axe to grind” (politically motivated) case. Like I said - a guess. But this admin. is not above such tactics. I’m thinking specifically of previous threats to raise US postal rates for Amazon. Also, more recent threats to investigate a potential government criminal witness’ father-in-law.
By contrast SEC has jurisdiction over what goes in these accounts (ie, investment vehicles like mutual funds, etc)
You are correct. I had assumed the disclosure issue related to the fund Prospectus and applied to all investors who might buy the fund. A second reading made it clearer. It’s some type of hidden administration fee targeted at the 401 K participants. However, were the issue instead related to the actual funds and their fees as stated in the fund prospectuses, than I think the SEC would still have jurisdiction.
“The U.S. Securities and Exchange Commission administers and enforces the federal laws that govern the sale and trading of stocks, bonds, mutual funds, and other securities. The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) has oversight of 401(k), pension and retirement plans.”: https://www.sec.gov/complaint/401k.htm
"As we went to press, The Wall St. Journal is reporting that an“obscure fee” charged by Fidelity to third-party fund companies for the right to distribute their offerings on Fidelity’s Funds Network platform, has caught the attention of federal regulators. Of central concern is whether a purported fee of 0.15% is being absorbed by the
fund companies themselves, or if it’s being passed to fund shareholders in the form of higher, undisclosed fees. Note: This matter does not affect Fidelity funds. "
Translation: "If you're annoyed by these fees, just buy OUR funds!"
What a lame non-response response by Fido.