Mutual funds are a popular investment vehicle for those looking to diversify their portfolios. They allow investors to pool their money together with others in order to invest in a variety of assets. Revenue sharing agreement mutual funds are a specific type of mutual fund structure that investors should be aware of.
Revenue sharing agreements (RSAs) are contracts between mutual fund companies and service providers, such as record-keepers and investment advisors. These contracts dictate how the mutual fund company will compensate the service provider for their services. Typically, the service provider will receive a percentage of the mutual fund’s assets under management (AUM) as compensation for their services.
In the case of revenue sharing agreement mutual funds, the mutual fund company and service provider agree to split the fee paid by the investor for the mutual fund’s management and operating expenses. This means that a portion of the fees paid by investors goes directly to the service provider as compensation for their services.
One of the benefits of revenue sharing agreement mutual funds is that they can help mutual fund companies negotiate lower fees with service providers. By sharing a portion of the fees with the service provider, the mutual fund company can negotiate a lower overall fee for the mutual fund. This can lead to lower expenses for the investor, which can increase their investment returns over time.
However, revenue sharing agreement mutual funds can also pose a conflict of interest for the service provider. Since they receive a portion of the fees paid by investors, they may have an incentive to recommend mutual funds that offer higher fees. This may not always be in the best interest of the investor, who may be better served by a mutual fund with lower fees.
Investors should also be aware that revenue sharing agreement mutual funds may not always be disclosed in a mutual fund’s prospectus. This can make it difficult for investors to know whether their mutual fund is subject to a revenue sharing agreement and how it is impacting their investment returns.
Overall, revenue sharing agreement mutual funds can offer benefits for both mutual fund companies and service providers, but investors should be aware of the potential conflicts of interest and lack of transparency associated with this structure. It is important for investors to carefully review a mutual fund’s prospectus and consult with a financial advisor before investing in any mutual fund, including revenue sharing agreement mutual funds.