Exclusive: Some wealth advisers take a fee for client fund assets

Fri Apr 5, 2013 12:54pm EDT
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By Jed Horowitz

(Reuters) - At least three wealth management firms that market themselves as objective financial advisers are getting payments for investing their clients' money in certain mutual funds, a practice that even some of these firms say could create conflicts of interest.

The firms, known as registered investment advisers, are typically paid by clients with fees tied to the growth or contraction of client assets, and not to specific products. But Fidelity Investments and Charles Schwab Corp (SCHW.N: Quote) are paying these financial advisers as much as 0.25 percent of the assets that their clients put into no-transaction-fee mutual funds.

Such funds are popular with ordinary investors because they don't have to pay commissions to buy or sell them, although some advisers say they have higher expenses than funds with commissions. Brokers such as Fidelity and Schwab make hundreds of millions of dollars in fees selling funds that they and others manage.

The three wealth management firms receiving product-related fees are Luminous Capital, a division of First Republic Bank (FRC.N: Quote); Sontag Advisory LLC, a unit of National Financial Partners Corp NFP.N; and PHH Investments Ltd, which specializes in managing retirement income for pilots, a Reuters review of regulatory filings shows.

A fourth firm, Dion Money Management LLC, had also been taking payments from Fidelity, according to a 2012 regulatory filing disclosing its business practices. Last month, however, the Williamstown, Massachusetts-based firm made a new filing that no longer mentions such payments.

The payments can potentially add millions of dollars of annual revenue for the wealth management firms, but also create incentives for advisers to direct clients to those funds for their own benefit.

Greg Berardi, a First Republic spokesman, said Luminous invests less than 4 percent of client assets in Fidelity's no-transaction-fee funds. Luminous, founded in 2008 by former Merrill Lynch brokers, is among the 20 largest independent financial advisory firms, with $5.5 billion in client assets, according to its regulatory filings.

"Clients trust us to make investment decisions that are always in their best interests, and that is the way we have always conducted business," Berardi said. The founders of Luminous, who sold their firm in December to First Republic for $125 million, declined to comment.   Continued...

A man walks past a Charles Schwab Investment branch in Washington in this January 19, 2010, file photo. U.S. market makers are increasingly paying discount brokers for trading business, raising questions about whether mom-and-pop investors get the best possible prices when they trade online. REUTERS/Jim Young/Files