Fidelity lawsuit and the ERISA litigators will always be watching


Fidelity is being sued again, this time regarding payments made by mutual funds to the Fidelity FundsNetwork. It is alleged that these payments are a kickback and a replacement for revenue sharing.


I’m not going to weigh in on the lawsuit because it’s pending, but I will say that any type of arrangement that looks suspicious will be treated by ERISA attorneys assuspicious and any payment from a mutual fund company to anyone for placement is going to be scrutinized.


While fee disclosure has helped transparency, it hasn’t fully eliminated some of the novel ways that fees maybe slapped on to make up the shortfall from the declining revenue sharing payments.


I can never forget the producing third-party administrator that eliminated its practice of pocketing revenue sharing by creating a 50 basis point, daily custodial platform access fee, which is about 40-45 basis points more than any daily custody platform would charge. It may be transparent in disclosure, but it didn’t make it right.


I anticipate several daily custodial platforms that will start charging access of other mutual fund companies especially if that custodian has proprietary funds. This practice will start and continue until they’re sued or the government says something. Consider mutual fund access to these platforms as the whole call for net neutrality. Will mutual funds have to pay for access like Netflix might if net neutrality is completely ended? Is that fair, especially when we know Vanguard and DFA can’t afford to pay them from their meager expense ratio? Time will tell, but ERISA litigators will always be watching.

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