Have you ever heard of a practice called "revenue sharing" by mutual fund companies and brokers? It might sound like a good thing -- it has the word "sharing" in it, after all, and we've all been told how nice it is to share. But the money being shared isn't being shared with you. It's actually your money, and it's being shared with others!
The practice involves a mutual fund company paying a broker that sells shares of one of its funds to a customer. That might sound like a sordid kickback, but it's explained by some as merely a reimbursement for sales expenses. Either way, it presents some problems for the fund investor.
For starters, you might not be guided to the best funds if the person guiding you is being offered an incentive to steer you toward particular funds.
Making matters worse, the revenue-sharing will eat away at some of your profits. In an article at fpanet.org, Kenneth Moon offered this eye-opening example: "According to the McHenry Revenue Sharing Report, a 45-year-old participant with a hypothetical rollover balance of $300,000 could have her balance reduced by as much as $213,000 by a retirement age of 65." He included a graph showing the growth of the investment if $10,000 is added annually and the growth rate is 10% annually, without revenue sharing, vs. 9.5% annually with it.
Supporters of this revenue sharing (and you can probably guess who they are) will likely object to this depiction, explaining that the money is coming from the fund company, not the fund itself. Still, one might ask where the fund company's money comes from. The answer: Us investors, via the fees we pay.
In an MSN Money article, Eric Jacobson reported that Merrill Lynch
As regulators continue to address this issue, look for increased disclosure, such as this statement from Citigroup's
In the meantime, don't take your broker's word for it. Look into whether revenue sharing is at work, and see what other funds are available. Take a look at our Broker Center for help.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.