Steve Braun

Apr. 4, 2006 - Nigerian Soccer and Investing

Check out this interesting headline:

"Take Bribes but Be Fair, Soccer Refs Told"

You are not hallucinating.

That is the headline from a Reuters story on March 31 about referees in the Nigerian Football League being allowed to accept bribes from teams. To maintain the integrity of the game, however, officials are instructed to "only pretend to fall for the bait, but make sure the result doesn't favor those offering the bribe."

They must be joking. As a sports fan, such a practice astounds me but it appears to be true.

So what does this have to do with investing?

Believe it or not, a similar game is played at many investment firms in the United States. It's called "revenue sharing." Revenue sharing is when a mutual fund company pays an investment firm to promote its mutual funds over those of its competitors. This is perfectly legal.

To understand how this crazy system works, let's stick with the soccer analogy.

The referees are the investment firms you trust to help you make wise investment choices.
The soccer teams are the mutual fund companies competing to attract your investment dollars.
Your money is the prize that goes to the victor.

You put your trust in the investment firm to call a fair game between the available mutual fund companies and to help you achieve your investing goals.

Unlike Nigerian soccer, however, in this game the investment firm actually tells you that the revenue sharing payments will likely impact the advice you receive and that it will be biased toward the mutual fund companies paying the most money. That is, the outcome of the "game" is for sale to the highest bidders.

And it's a big sale.

For example, Edward Jones reports that it received $172 million in revenue sharing payments in 2005, comprising 52% of the firm's total profit of $330 million!

Go read what Edward Jones has to say about its revenue sharing practices to get a flavor for what's at stake.

This game is played all over Wall Street at notable firms such as Morgan Stanley, Merrill Lynch, UBS, Ameriprise, Smith Barney, A.G. Edwards, etc. It's not always described as "revenue sharing" but the result is the same -- you will be offered a smaller list of mutual fund choices.

The problem for you is that the recommended mutual funds may not be the best performing or least expensive investments on the market. In the end, you foot the bill for revenue sharing.

It makes Nigerian soccer refs look tame.

[PS - Welcome readers from AllFinancialMatters. Thanks for the link JLP.]