Columnist: Revenue Sharing Goes Underground

In this new age of heightened disclosure, fund companies and broker/dealers are being more up front about revenue sharing agreements, but the admissions are being "provided in language that is often vague or so dense that many fund buyers never digest it," according to an editorial in this week's issue of BusinessWeek magazine.

The magazine's editors further claim that "existing disclosure requirements are meager at best," and they argue that new rules proposed by former Securities and Exchange Commission Chairman William H. Donaldson should go forward. The rules would require that a brokerage disclose to a client how much it expects to collect in revenue sharing from that sale before the client buys a fund.

That would be an improvement, but even more information needs to be disclosed. As an example of the sort of disclosure it would like to see, the magazine cites how Smith Barney not only discloses the maximum revenue-sharing fee it charges fund families, but also details the hefty percentage of its fund sales that went to 37 favored families in 2004. The list is in order from those who paid the most to those who paid the least.

That kind of data gives investors a clearer picture of the incentives Smith Barney has to pitch particular funds and should be required of all broker dealers, according to the editorial.