The Deception Series, Part 11--The Deception Series Summary

Part 11--The Deception Series
Summary

What is the Adviser Paid Fee (APF)?
The APF is a revenue sharing agreement which exists between the Principal Funds Inc. and intermediaries (independent financial advisers, banks, and others who sell mutual funds) on shares which were sold in the Strategic Asset management (SAM Portfolios). This fee is payable monthly at the annual rate of 50 basis points (25 basis points for class C shares) of the average daily net assets sold prior to March 1, 2006 and held continuously by customers (SAM shareholders) of the selling agent, according to the Principal Funds 2009 Prospectus.

What mutual funds were covered? The five WM Strategic Asset Management (SAM) Portfolios, which became known as the Principal Strategic Asset Management (SAM) Portfolios after the WM Group of Funds was acquired by the Principal Financial Group in December 2006 for $730 million. The APF was paid on these five SAM Portfolios: SAM Balanced, SAM Strategic Growth, SAM Flexible Income, Conservative Growth, and SAM Conservative Balanced.

How can I find out how much was money my investment generated in APF payments?
Your first contact should be the investment adviser who actually sold you the SAM Portfolios. If they cannot provide the amount, contact Nora Everett, president, Principal Financial Group, 1-800-986-3343 or everett.nora@principalfunds.com.

What is the basic issue?
Your investment advisor received a revenue sharing agreement based on your investment in any of the SAM Portfolios. This revenue sharing agreement may have compromised your advisor’s objectivity in terms of making the best investment decisions concerning your ownership of the SAM Portfolios. If you feel this occurred, you can make the case that some of the APF money should be shared with you since your actual investment in the SAM Portfolios generated the money for the APF in the first place.

When was the APF in effect?
The APF was paid to investment advisers and/or their broker-dealers from 1999 through the present time (June 2009) to advisers who sold the SAM Portfolios through March 1, 2006. After that time, new SAM sales were not covered by the APF. However, SAM funds sold prior to March 6, 2006 were all covered by the APF and payments were made to those intermediaries and/or advisers who sold those funds from the date of sale to the present time. The APF was offered continuously by the WM Group of Funds during the entire period they sold SAM Portfolios. Payments were continued by Principal Funds through the present time.

Who received the APF?
The APF was paid to the broker/dealer firm and then was passed along in total, or in part, to the investment adviser who actually sold you the SAM Portfolio.

Is the shareholder entitled to a portion, or all, of the APF which the shareholder generated?
This is the $64,000 Question. Revenue sharing is a very sticky and controversial practice, so the legal and ethical experts can decide. But at the practical level, it was your purchase which generated the APF in the first place. The payment of this fee also created a conflict of interest between you (the shareholder) and your investment adviser. In the interim, if you are a shareholder who generated an APF fee while you owned any of the SAM Portfolios, you certainly have a right to ask for a portion of the money and at least an explanation about the practice.

What is a fiduciary duty?
A fiduciary holds a long-recognized role in English common law as a trustee. A fiduciary is held to a stricter standard of behavior than the comparable tortuous duty of care at common law. A fiduciary has a duty to not be in a situation where personal interests and fiduciary duty conflict. This includes a duty to not be in a situation where a fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from his fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest. Fiduciaries must conduct themselves "at a level higher than that trodden by the crowd" and that "the distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty." This can be interpreted to include your investment adviser, although it is commonly applied to standards for trustees in pension plans, or anyone with oversight responsibilities for a person’s financial or physical well being.


What class action lawsuits have been filed challenging the APF?
There have been at least two class action lawsuits brought against the Principal Financial group and the WM Group of Funds which have challenged the legality of the APF. A release regarding one of these lawsuits can be seen here.

Important Note: The Courts Have Ruled that the APF is Legal
As a result, you investment adviser did not do anything illegal. However, I believe the APF clearly compromised their ethical and fiduciary responsibilities to shareholders. This meant they often put their personal monetary benefit ahead of the interests of their clients, while the mutual fund company engaged in an activity which intentionally compromised the objectivity of the adviser – client relations and introduced an unnecessary conflict of interest.