Seventy-Nine Advisers Admit to Breach of Fiduciary Duty

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For many mutual funds, there are multiple so-called share classes of that one fund. Each share class represents a different combination of sales charges, expense ratios, and minimum initial investment requirements. However, other than these basic differences, each share class is an identical investment.

Some commission-based brokers receive a higher commission on certain share classes. This creates a temptation or conflict of interest for the broker to sell the higher-cost share class to the client, even though a lower-cost share class is available and in the client’s best interest.

In February of 2018, the Securities and Exchange Commission’s (SEC’s) Division of Enforcement created the “Share Class Selection Disclosure Initiative.” This initiative was designed “to address ongoing concerns that, despite the fiduciary duty imposed by the Advisers Act” and other SEC actions, “investment advisers were not adequately disclosing, or acting consistently with the disclosure regarding, conflicts of interest related to their mutual fund share class selection practices.”

In other words, many so-called advisors were still selling clients the more costly share despite their fiduciary duty and many were doing so without having thoroughly disclosed the conflict of interest to the client.

This SEC initiative decided the easiest way to catch all the violators was to enable firms to avoid financial penalties if they turned themselves in, agreed to compensate harmed clients, and corrected any relevant disclosure documents.

On March 11, 2019, the SEC announced that 79 investment adviser firms will return more than $125 million to clients after self-reporting “violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures.”

The SEC’s Press Release read in part:

The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures. The orders issued today address advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.


The SEC’s orders found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected. According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.

This is a small example of one way that financial compensation matters. The repayment of $125 million represents only the direct cost of 12b-1 fees to clients. It does not represent the indirect costs of investments being potentially invested in sub-par funds. And this represents only the self-reported violations in this particular arena, not every way these firms may have failed in their fiduciary duty.

Additionally, the SEC sited these commission-based advisers only for their failure to disclose these fees. It is not clear that these firms could have fulfilled their fiduciary duty even if these compensation arrangements had been more adequately disclosed.

An investment adviser cannot disclose or negotiate away their fiduciary duty. Neither can any document signed by the client waive the fiduciary duty required by federal law.

Even if your advisor is not on this list, we believe you would do better by avoiding an advisor who stands to gain from the financial advice they provide. The ninth question in our Ten Questions to Ask a Financial Advisor is “Is the fee I pay you the only compensation you receive?”

You deserve investment advice from a firm where you don’t have to second guess where their loyalties lie.

Some articles have highlighted the firms that are paying the highest amounts as Wells Fargo, RBC, LPL, Raymond James, and Kestra. But we believe that you should check to see if your adviser is anywhere on the list.

Investment Advisers Who Self-Reported Advisers Act Violations

  1. Ameritas Investment Corp.
  2. AXA Advisors LLC
  3. BB&T Securities LLC
  4. Beacon Investment Management LLC
  5. Benchmark Capital Advisors LLC
  6. Benjamin F. Edwards & Co. Inc.
  7. Blyth & Associates Inc.
  8. BOK Financial Securities Inc.
  9. Calton & Associates Inc.
  10. Cambridge Investment Research Advisors Inc.
  11. Cantella & Co. Inc.
  12. Client One Securities LLC
  13. Coastal Investment Advisors Inc.
  14. Comerica Securities Inc.
  15. Commonwealth Equity Services LLC
  16. CUSO Financial Services LP
  17. D.A. Davidson & Co.
  18. Deutsche Bank Securities Inc.
  19. EFG Asset Management (Americas) Corp.
  20. Financial Management Strategies Inc.
  21. First Citizens Asset Management Inc.
  22. First Citizens Investor Services Inc.
  23. First Kentucky Securities Corporation
  24. First National Capital Markets Inc.
  25. First Republic Investment Management Inc.
  26. Hazlett, Burt & Watson Inc.
  27. Hefren-Tillotson Inc.
  28. Huntington Investment Company, The
  29. Infinex Investments Inc.
  30. Investacorp Advisory Services Inc.
  31. Investmark Advisory Group LLC
  32. Investment Research Corp.
  33. J.J.B. Hilliard, W.L. Lyons LLC
  34. Janney Montgomery Scott LLC
  35. Kestra Advisory Services LLC
  36. Kestra Private Wealth Services LLC
  37. Kovack Advisors Inc.
  38. L.M. Kohn & Company
  39. LaSalle St. Investment Advisors LLC
  40. Lockwood Advisors Inc.
  1. LPL Financial LLC
  2. M Holdings Securities Inc.
  3. MIAI Inc.
  4. National Asset Management Inc.
  5. NBC Securities Inc.
  6. Next Financial Group Inc.
  7. Northeast Asset Management LLC
  8. Oppenheimer & Co. Inc.
  9. Oppenheimer Asset Management Inc.
  10. Park Avenue Securities LLC
  11. PlanMember Securities Corporation
  12. Popular Securities LLC
  13. Principal Securities Inc.
  14. Private Portfolio Inc.
  15. ProEquities Inc.
  16. Provise Management Group LLC
  17. Questar Asset Management Inc.
  18. Raymond James Financial Services Advisors Inc.
  19. Raymond Lawrence Lent (d/b/a The Putney Financial Group, Registered Investment Advisors)
  20. RBC Capital Markets LLC
  21. Robert W. Baird & Co. Incorporated
  22. Ryan Financial Advisors Inc.
  23. SA Stone Investment Advisors Inc.
  24. Santander Securities LLC
  25. Select Money Management Inc.
  26. Silversage Advisors
  27. Sorrento Pacific Financial LLC
  28. Spire Wealth Management LLC
  29. SSN Advisory Inc.
  30. Stephens Inc.
  31. Stifel, Nicolaus & Company Incorporated
  32. Summit Financial Group Inc.
  33. Syndicated Capital Inc.
  34. TIAA-CREF Individual & Institutional Services LLC
  35. Transamerica Financial Advisors Inc.
  36. Trustcore Financial Services LLC
  37. Wells Fargo Clearing Services LLC
  38. Wells Fargo Advisors Financial Network LLC
  39. Woodbury Financial Services Inc.

Photo by Pawel Janiak on Unsplash

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.