SEC Levies $300,000 Fine for Misleading Investors About Account Fees

mary-annBy Mary Ann Hanke, Fall 2016 Student Intern

On July 14, 2016, the Securities and Exchange Commission published a press release on its decision to bring an enforcement action against RiverFront Investment Group, and the resulting settlement of the case. RiverFront had agreed, without admitting or denying the charges, to pay a $300,000 fine to settle the case.  This news bit alone is nothing unusual. Securities action settlements are commonplace. What is noteworthy, however, is why the SEC brought the case in the first place.

RiverFront was offering to investors what are called “wrap accounts.” Wrap accounts derive their name from the concept that the fees from multiple different services and types of investments can be “wrapped” up in one bundled fee. You can imagine that this might be attractive to many investors, because for one annual price, the investment firm will manage both retirement and non-retirement asset accounts.

Another way of looking at this fee structure, is that the wrap accounts are asset-based fees. The investor pays the investment adviser a certain percentage of the total account value under the firm’s control. This type of fee structure became popular as an alternative to commission-based fees. Commission-based fees seemed to provide incentive to brokers or investment advisers to trade excessively within investor’s accounts to rack up high commissions, otherwise known as “churning.” (Even so, remember: depending on the type of investment and the needs of the investor, wrap accounts can be unnecessarily expensive. A responsible broker or investment adviser will be able to advise you on the appropriate type of fee setup.)

How does this relate back to RiverFront? Well, the investment firm was offering these bundled service packages for an annual wrap fee. They represented to investors that because of the way they were processing client transactions, the wrap fee would cover all of their transaction costs. They disclosed that trades would be primarily executed through one sponsoring broker. However, it turned out that in its wrap account trading, RiverFront was generating additional costs per transaction by using brokers outside of the program sponsor.

The fact that RiverFront did not disclose the frequency of these instances was, according to the SEC, a material misrepresentation to its investors, because it misled investors about “the overall cost of selecting RiverFront to manage their portfolios.” If investors expect to pay a certain amount at a certain time, especially in wrap account programs, any deviations from that should to be disclosed.

Are you receiving the right disclosures about the trading in your account? Don’t let excessive fees eat away at your investments, and as always, ask your investment adviser or broker about your fee setup to determine what is best for you.