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.
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. Enviy 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.
The RIA recommended third-party mutual funds to 403(b) and IRA clients, who directed the investments.
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’s affiliated broker-dealer, Envoy Securities LLC, which is a huge problem and conflict of interest.
Envoy’s Form ADV disclosures to plan sponsors during the relevant period disclosed that certain mutual funds “may” pay a “dealer” 12b-1 fees, but they failed to disclose that the “dealer” receiving the 12b- 1 fees was Envoy’s affiliate.
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.