A good chunk of my work as an ERISA attorney is working with financial advisory firms in managing their retirement plan practice especially with 401(k) plans. I have many registered investment advisory clients around the country and I counsel them all areas of their practice. I always caution about share classes in mutual funds offered to plan participants and the need to find the lowest costing share class possible.<\/p>\n
So here is an example of advisory firm getting the attention of the government. The SEC issued a cease-and-desist order against Envoy Advisory Inc. Envoy agreed to pay disgorgement for failing to offer the lowest-fee mutual fund share classes available and failing to adequately disclose compensation paid to its affiliated broker-dealer.<\/p>\n
The RIA recommended third-party mutual funds to 403(b) and IRA clients, who directed the investments.<\/p>\n
According to the SEC, from January 2013 through March 2017, Envoy recommended, and plan participants and IRA holders held, Class A mutual fund shares when less expensive institutional share classes of the same mutual funds were available. Class A shares usually include 12b-1 fees. In this case, the 12b-1 fees paid by mutual funds held by plan participants and IRA holders went to Envoy\u2019s affiliated broker-dealer, Envoy Securities LLC, which is a huge problem and conflict of interest.<\/p>\n
Envoy\u2019s Form ADV disclosures to plan sponsors during the relevant period disclosed that certain mutual funds \u201cmay\u201d pay a \u201cdealer\u201d 12b-1 fees, but they failed to disclose that the \u201cdealer\u201d receiving the 12b- 1 fees was Envoy\u2019s affiliate.<\/p>\n
Thanks to the Tibble case, there is more pressure to find the lowest cost available share class and this Envoy case is a text book case for what advisory firms should not do.<\/p>\n
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