A mutual fund that pays a brokerage firm to be on the firm's "preferred" group of investments list may receive up to 10 times the amount of money as a fund not listed with the brokerage firm, according to new research from Cerulli Associates.

This practice, commonly known as revenue sharing, is legal but offers no transparency, which has led regulators to debate on whether it hurts investors. Competition among funds to get on firms' list is fierce, Cerulli's research says, with favored funds receiving, on average, three-times greater inflows than funds not on the list.

Regulators found, for instance, that at the brokerage firm Edward D. Jones & Co., 95-98% of mutual fund sales were those involving seven preferred fund families. Although firms like Edward D. Jones and Morgan Stanley have settled with regulators over disclosure of mutual fund sales incentives, the controversy is far from over.

Late last year, the Department of Labor, for instance, recommended new rules that would, among other things, help retirement plan sponsors "obtain full and complete information concerning all revenue-sharing agreements for each individual investment option." One concern the SEC has is whether revenue-sharing agreements raise fees for investors.

Cerulli's research shows that for smaller fund companies, it generally costs less to pay firms to sell their funds than to sell those funds through an in-house sales force.

While a few firms such as UBS AG and Citigroup's Smith Barney unit have disclosed revenue-sharing arrangements on their Web sites, resistance to complete disclosure remains strong. Plan sponsors, on the other hand, want their providers to be entirely free of conflicts of interest. To that end, many sponsors have hired consultants to help deal with the lack of transparency.

Although the debate on revenue sharing continues, the mutual fund industry is not expecting this practice to disappear any time

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