The Security and Exchange Commission has recently reported that three advisory firms that are part of the American International Group have been fined millions of dollars in federal civil charges as a result of levying unwarranted fees on more than one thousand mutual fund clients. The three companies have settled the fines, which come to $9.5 million in total.
The three companies that were fined by the SEC were SagePoint Financial, Royal Alliance Associates and FSC Securities Corp. All three firms were found to be failing to act in the best interests of their clients for monetary gain and were instead accused of acting negligently. This was because the advisors were found to have pushed clients towards higher fee fund share classes and places them in accounts with costly wrap fees, which cover trading charges even with minimal trading levels.
Conflict of interests
An official from the Securities and Exchange Commission said that investment professionals had to be careful that there was no conflict of interest when choosing mutual share classes for clients, as otherwise they could end up benefitting financially at the expense of their customers.
According to SEC officials, the three companies sold mutual fund shares to customers that came with fees that would financially benefit the advisor or broker selling the fund. This was happening even in cases where cheaper alternatives were available to the client and because of this the three companies manages to accrue around $2 million in fees.
The three firms were also found to have been involved in what is known as reverse churning, where the clients were placed in accounts that had wrap fees included in order to cover the cost of trading and the cost of advisory services. They were doing this with clients that did not trade frequently and would have been better off with advisory-only accounts, which come with a lower fee.
The three companies have now been forced to pay $9.5 million in total to the SEC as well as more than $1 million in refund charges to clients who were affected by the reverse churning scam. The American International Group has four broker-dealer companies under its umbrella at present and the companies that were fined by the SEC represent three of them. However, the fourth company, Woodbury Financial Services, was also recently fined around $200,000 as a result of hitting clients with over the top sales charges.Read More