Issues in Mutual Fund Revenue Sharing Payments

Journal of Index Investing, Vol. 3, No. 1, pp. 52-57, Summer 2012

6 Pages Posted: 27 May 2012 Last revised: 27 Feb 2016

See all articles by John A. Haslem

John A. Haslem

University of Maryland - Robert H. Smith School of Business; University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 26, 2012

Abstract

Revenue sharing payments are mutual fund distribution costs that conflict with continuing shareholder interests by directly reducing fund assets and shareholder returns. The “stated” purpose of revenue sharing payments is to defray broker costs of servicing customer accounts and for marketing and educational support. Revenue sharing payments do this, but more importantly they allow fund advisers to reward high selling brokers of fund shares, and to defray costs.

Revenue sharing payments are not separately disclosed in fund expense ratios and for this they have been called the fund industry’s “dirty little secret.” If revenue sharing payments were to be disclosed in fund expense ratios, this would reflect a move from regulatory and fund adviser slights of hand to fee transparency and reality. But, in any case, revenue sharing payments conflict with continuing fund shareholder interests and should be prohibited.

Revenue sharing payments include: (1) marketing pool payments, (2) bonus compensation, (3) syndicated distributions (external source), (4) sub-transfer agency fees, (5) networking fees, and (6) “other” revenue sharing payments. In addition, adviser fall-out benefits are agreed broker rebates of so-called “excess” revenue sharing payments to mutual fund advisers. Fall-out benefits motivate fund advisers and fund brokers to make additional revenue sharing payments that benefit both parties, but not shareholders.

Keywords: mutual funds, revenue sharing payments, distribution costs, agency conflicts, opaque disclosure, fall-out benefits, management fees, reward broker sales, expense ratios, shareholder returns

JEL Classification: G2, G23, G28

Suggested Citation

Haslem, John A. and Haslem, John A., Issues in Mutual Fund Revenue Sharing Payments (May 26, 2012). Journal of Index Investing, Vol. 3, No. 1, pp. 52-57, Summer 2012, Available at SSRN: https://ssrn.com/abstract=2067079

John A. Haslem (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

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Washington, DC DC 20016
United States
202-236 3172 (Phone)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742
United States
202-387 2025 (Phone)

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