Mutual Funds Pay Brokerage Firms to Peddle Their Funds

Suppose that you decide to buy a mutual fund so you call your broker for some suggestions. After listening to your investment objectives, your broker recommends fund XYZ. He or she gives you the fund's performance history, key holdings, charges and fees. The fund seems to meet your investment objectives so you instruct the broker to buy it.

Later you ask yourself why did the broker select fund XYZ from the universe of thousands of mutual funds from which to choose? In some cases the broker may have selected the fund because it paid the brokerage firm to push the fund to its clients. So it could be that you bought a fund that was best for the broker to sell but not one that was best for you to own. The practice of brokerage firms charging mutual funds to sell their funds is called revenue sharing. The brokerage firms benefit from the revenues they glean from the mutual funds and the funds benefit from the preferential treatment that they receive from the brokerage firms.

Revenue sharing is legal but often the practice is not fully disclosed to investors. Therefore, be sure to ask your broker about revenue sharing agreements before you purchase a fund.