fee-disclosure

What this skill does

# Fee Disclosure

## Purpose
Guide the understanding and application of fee disclosure requirements across the advisory and brokerage landscape. This skill covers RIA fee disclosure (Form ADV), fund-level fee tables, Reg BI cost obligations, wrap fee programs, ERISA fee transparency, and revenue sharing — enabling a user or agent to identify where fee disclosure gaps or violations may arise.

## Layer
9 — Compliance & Regulatory Guidance

## Direction
prospective

## When to Use
- Designing fee schedules and fee disclosure documents for advisory firms
- Reviewing Form ADV Part 2A Item 5 (Fees and Compensation) for completeness
- Evaluating fund prospectus fee tables for compliance with SEC format requirements
- Assessing Reg BI disclosure obligations related to costs and compensation
- Analyzing wrap fee programs for cost-effectiveness and disclosure adequacy
- Reviewing ERISA fee disclosures for retirement plan service providers
- Evaluating revenue sharing arrangements and their disclosure requirements
- Identifying hidden fees, indirect compensation, and all-in cost analysis

## Core Concepts

### Form ADV Part 2A — Item 5 (Fees and Compensation)
RIAs must disclose in their firm brochure:
- **Fee schedule** — how fees are calculated (asset-based, fixed, hourly, performance-based), fee rates and tiers, minimum account sizes
- **Billing method** — frequency (monthly, quarterly), in advance or arrears, pro-ration for partial periods
- **Other fees and expenses** — custodian fees, fund expense ratios, transaction costs, wire fees, and any other costs the client will bear in addition to the advisory fee
- **Compensation for sales of securities** — if the adviser or its supervised persons receive commissions, 12b-1 fees, or other sales-based compensation, this must be disclosed with a description of the conflict
- **Refund policy** — how prepaid fees are refunded if the relationship terminates mid-period

The disclosure must be "full and fair" and not misleading. The SEC has brought enforcement actions for advisers who disclosed fee schedules but obscured the total cost to clients by omitting indirect compensation or failing to describe how fund-level fees compound on top of advisory fees.

### Form CRS Fee Disclosure
The "What are your fees?" section of Form CRS must include:
- Principal fees and costs for the firm's services
- A description of other fees and costs the client may pay (transaction, custodian, fund expenses)
- A statement that the client will pay fees and costs whether or not they make or lose money
- Conversation starters: "Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?"

Form CRS is limited to 2 pages (4 for dual registrants), so fee disclosure is necessarily summarized. It must direct clients to the ADV Part 2A for more detailed information.

### Reg BI Disclosure Obligation — Costs
Reg BI requires broker-dealers to disclose material facts about costs and fees before or at the time of a recommendation:
- All fees and costs that apply to the customer's transactions, holdings, and accounts
- Material limitations on recommendations (e.g., proprietary products only, limited product shelf)
- Compensation the BD and representative receive, including from third parties

The SEC has emphasized that the disclosure must be specific enough to allow the customer to understand the total cost of the recommendation and compare it to alternatives. Vague references to "standard industry fees" are insufficient.

### Prospectus Fee Tables
SEC rules require a standardized fee table in mutual fund and ETF prospectuses:

**Shareholder Fees (paid directly from the investor's investment):**
- Maximum sales charge (load) on purchases
- Maximum deferred sales charge (CDSC)
- Redemption fees
- Exchange fees
- Account fees

**Annual Fund Operating Expenses (deducted from fund assets):**
- Management fees
- Distribution (12b-1) fees
- Other expenses
- Acquired fund fees and expenses (for fund-of-funds)
- Total annual fund operating expenses
- Fee waiver/expense reimbursement (if applicable)
- Net expenses after waiver

**Expense Example:** A standardized illustration showing the dollar cost of investing $10,000 over 1, 3, 5, and 10 years, assuming a 5% annual return and redemption at the end of each period. This enables cross-fund comparison regardless of marketing language.

### 12b-1 Fees
Named after SEC Rule 12b-1, these are annual distribution and marketing fees charged to fund assets:
- **Maximum permitted:** 0.75% for distribution, plus 0.25% for shareholder services (total 1.00%)
- **Disclosure:** Must appear in the prospectus fee table and in the fund's Statement of Additional Information
- **Conflict:** 12b-1 fees create an incentive for advisers and brokers to recommend higher-cost share classes. The SEC and FINRA have brought numerous enforcement actions for recommending share classes with 12b-1 fees when lower-cost share classes of the same fund were available to the client.
- **Share class selection:** Firms must have policies to ensure clients are placed in the most appropriate share class. The SEC's Share Class Selection Disclosure Initiative (2018) resulted in over $139 million in disgorgement from advisers who failed to disclose 12b-1 revenue.

### Revenue Sharing and Shelf-Space Arrangements
Fund companies may pay broker-dealers or advisory platforms for preferred placement, marketing support, or inclusion on recommended lists:
- **Revenue sharing** — payments above standard 12b-1 fees, often basis points on assets held on the platform
- **Shelf space** — payments for inclusion on "preferred" or "recommended" fund lists
- **Sub-TA fees** — payments for sub-transfer agency and recordkeeping services, which may exceed the actual cost of providing those services

Disclosure requirements: Both FINRA and the SEC expect clear disclosure of revenue sharing arrangements. Failure to disclose that a firm receives additional compensation for recommending specific funds is a serious conflict-of-interest violation. The SEC has brought enforcement actions where firms described fund selection as "objective" while receiving undisclosed revenue sharing.

### Wrap Fee Programs
Wrap fee programs bundle advisory, brokerage, custody, and other services into a single asset-based fee:
- **Form ADV Part 2A Appendix 1** — wrap fee sponsors must deliver a wrap fee brochure disclosing the services included, the total fee, and a comparison to unbundled pricing
- **Cost-effectiveness analysis** — wrap fees benefit active traders (who would otherwise pay per-trade commissions) but penalize buy-and-hold investors. Firms must evaluate whether wrap is cost-effective for each client.
- **Trading away** — when a wrap program adviser executes trades through a broker-dealer other than the wrap sponsor, the client may pay additional transaction costs. These must be disclosed.
- **Reverse churning** — the wrap equivalent of churning: charging an ongoing asset-based fee for an account with little trading activity. FINRA and the SEC have flagged this as a concern.

### ERISA Fee Disclosure
**DOL Section 408(b)(2) disclosure** — retirement plan service providers must disclose to plan fiduciaries:
- A description of services
- Whether the provider will act as an ERISA fiduciary
- All direct and indirect compensation (including revenue sharing, 12b-1 fees, float, sub-TA fees)
- Compensation paid among related parties

**DOL Section 404a-5 disclosure** — plan administrators must provide participants with:
- Plan-level information (general plan administration and individual expenses that may be charged)
- Investment-level information (performance, benchmark, fees and expenses for each investment option)
- Quarterly statements showing actual fees and expenses charged to the participant's account

### Hidden Fees and All-In Cost
Beyond explicit fees, clients