When you go grocery shopping at your local supermarket, chances are the products you see on the shelves paid for that space. And those products at eye level paid a premium. It's called a slotting fee. What usually comes as a surprise to investors is that the investment product being pitched to them by their financial advisor typically pays this fee. Some larger investment firms sell proprietary products through their advisors. These are also pushed hard because the firm makes more money off of them than when using a third party solution.
Revenue sharing is the term the industry uses when describing these payments. It sounds harmless, friendly even. It's anything but. Investors should be the sole source of compensation for all parties involved. And it should be done in a completely transparent manner for all to see. Investors are completely unaware that money is changing hands and that incentives are created to do things that are not always in the investors' best interest. These revenue sharing payments are disclosed in the fine print somewhere and on various government filings all firms make. I challenge you to find it...
It's one thing for Coca-Cola to pay for shelf space - you as a consumer probably know what soft drink you prefer. You can pay up for Coke or buy the store brand for less, your choice. But when you are paying for advice and solutions that you believe are in your best interest, it might be beneficial to know that your advisor can only show you products from those firms who paid to be in the room, mightn't it? Indeed, his/her employer actively push those investment products based on how much they pay. This can range from $10,000/year to tens of millions of dollars annually. Morgan Stanley just booted the largest mutual fund company in the world (Vanguard) because they don't pay for space.
This practice should be banned. When the investor comes to an advisor, they believe they are getting advice without conflicts of interest. Now, it's nearly impossible to eliminate ALL potential conflicts, but this is a brazen attempt at incentivizing "sales people" to push products without the customer being aware of it. If I walk into a Ford dealership, I know they're going to try and sell me a Ford! If I walk into Morgan Stanley, they can't show me Vanguard as a potential solution. Not allowed! How many Morgan Stanley reps volunteer that information?