A couple of years ago in the article “Where to Find the Hidden Fees of Commission-Based Firms” I demonstrated how to find all a firm’s fees with Ameriprise as the example. That year, Ameriprise’s ADV Part 2 required several pages just to disclose all the ways they made money which are hidden from the view of average consumers. Studies suggest that these disclosures confuse investors and often make them believe the exact opposite of what is actually true.
Consumers do not understand the consequences these disclosed practices have on the investment advice that they receive. I also believe many commission-based advisors themselves do not fully understand the consequence. I believe they see only those fees that they themselves receive. As a result, they do not realize the full impact that working in a commission-based environment has on their clients.
To illustrate this, here is a small section from the March 2018 Ameriprise Financial Planning Services ADV Part 2 which is describing how a mutual fund company can pay to included its funds in Ameriprise’s “Mutual Fund Program” and thus have those funds offered to Ameriprise clients as an investment product:
To be included in the Mutual Fund Program, firms have agreed to pay AEIS a portion of the revenue generated from the sale and/or management of mutual fund shares. Full Participation Firms make cost reimbursement payments at a higher level than do firms that have arrangements discussed in the “Other financial relationships” section. …
Ameriprise Financial Services received an asset-based payment (up to 0.20% per year for mutual funds) …
Certain Full Participation Firms mutual fund share classes may pay AEIS more marketing support for certain types of mutual funds. As a result, Ameriprise financial advisors may have an indirect incentive to sell such funds. …
Full Participation. Twenty-eight firms fully participate in the Mutual Fund Program. These fund firms include Columbia Management, Allianz Global Investors, American Century, BlackRock, Delaware Investments, Dreyfus, Deutsche Asset & Wealth Management, Eaton Vance, Federated, Fidelity, Goldman Sachs, Invesco, Ivy, Janus, John Hancock, JP Morgan, Legg Mason, Lord Abbett, MainStay, MFS, Neuberger Berman Management LLC, Nuveen, Oppenheimer, Principal, PGIM Investments (formerly Prudential), Putnam, Virtus and Wells Fargo. These firms are referred to as “Full Participation Firms.”
This type of arrangement is called “pay-to-play.” It means that the mutual funds that are promoted to clients are only the funds whose companies have paid Ameriprise to be included in the line-up. This method of compensation is most likely invisible to advisors, but it makes a big difference for clients. Fund companies who are unwilling to pay are often simply not included in the fund options advisors have at their disposal.
Furthermore, Ameriprise also prioritizes the presentation of these funds in the order of revenue paid to Ameriprise as disclosed on page 16 of their 2016 ADV Part 2:
Ameriprise Financial Services also has arrangements with firms for distribution support services. These firms make payments of up to 0.18% on sales and 0.10% on assets to Ameriprise Financial Services for these services, which support the distribution of the fund’s shares and 529 Plans by making them available on one or more of Ameriprise Financial Services platforms, commonly known as “shelf space.”
Many Ameriprise advisors may not even know that this conflict of interest exists between what is in the best interest of clients (low fees) and the constraints place on them as fiduciaries by the fact of their employment (limiting funds to those willing to pay-to-play and prioritizing funds by those willing to pay for shelf space).
This means, even if an Ameriprise advisor were trying to find a client the least expensive fund to satisfy the client’s investment needs, the advisor would likely only be perusing this limited selection of fund companies willing to pay to play. And, in reality, the lowest cost funds will likely be the ones that were unwilling to waste money paying to be listed.
Furthermore, because Ameriprise advisors receive only the smallest fraction of commissions earned as an incentive, many commission-based advisors may not even know the full lost opportunity costs and fees that their clients are paying.
I assume that “Full Participation” funds, who are paying Ameriprise the most, are listed more prominently within whatever investment resources, model portfolios, and other internal tools Ameriprise advisors use. I also assume that fund families which refuse to participate in such pay-to-play environments are either deprecated within Ameriprise systems or simply excluded entirely.
Morningstar releases a “Fund Family Report” semiannually which gathers data on and analyzes the largest 150 fund families. Using the most recent 2019 Fund Family Report, I analyzed the 28 Ameriprise “fully participating” firms using the two metrics that the report chose to highlight winners: Lowest Average Expense Ratio and Overall Scorecard Rank.
Lowest expense ratio is selected because, in 2015, a Morningstar article found that having a low expense ratio was better at predicting future returns than Morningstar Stars.
The Overall Scorecard Rank used to rank fund families from best (1) to worst (150) is based on Morningstar’s objective ranking system. Thus, if you want to argue that the funds may be expensive, but they are worth it, you would expect the fund families you select to have excellent Scorecard Ranks near the top of the 150 fund families.
All twenty-eight of Ameriprise’s “fully participating” firms were scored by the Morningstar Fund Family 150 report with the following scores:
|Fund Family||Rank out of 150||Average Expense Ratio|
|Allianz Global Investors||99||1.05%|
|BlackRock / iShares||31||0.29%|
|BNY Mellon / Dreyfus||110||0.76%|
|Eaton Vance / Calvert||91||0.94%|
|Legg Mason / Royce||58||0.79%|
|MainStay / IndexIQ||112||0.88%|
|TIAA / Nuveen||26||0.41%|
You can see from this that none of the fund families that fully participate with Ameriprise are in the top ten percent (15 fund families) of the 150 fund families according to Morningstar. Furthermore, half of the fund families with Ameriprise are in the bottom half (rank of 75+) of the rankings. Only eight fund families were given a “Positive” Rating by Morningstar.
Only three of the fund families fully participating with Ameriprise have average expense ratios below 0.50%. (Those are BlackRock / iShares at 0.29%, TIAA / Nuveen at 0.41%, and Fidelity at 0.43%.)
There is no easy way an Ameriprise Advisor could disclose the impact of using fund families selected for full participation in this pay-to-play scheme. However, the cost to clients is likely greater than the 0.20% overtly paid to Ameriprise. For example: What is the true cost of having none of the top ten percent of fund families represented in the fully participating funds?
We believe that limiting or prioritizing fund families based on payments from fund vendors is a breach of the fiduciary duty no matter how many disclosures you provide to a client. Furthermore, clients cannot legally lose their right to fiduciary care even if they willingly and knowingly sign a document that says that they are waiving their rights.
Photo by Andrea Natali on Unsplash