Avantax will pay more than $16 million in restitution and penalties to settle charges with the Securities and Exchange Commission that 1st Global Advisors recommended mutual fund share classes to clients without disclosing conflicts or revealing that more affordable options were available.
Parent company Blucora formed Avantax Wealth Management in 2019 by combining HD Vest Financial Services and 1st Global. According to the SEC’s order detailing the charges, Avantax reported more than $30 billion in assets under management (Blucora’s total wealth management segment exceeds $87 billion in total client assets, according to Avantax).
Mutual funds often include different kinds of share classes, offering similar objectives but a different fee structure design. This can result in situations where advisors recommend investing in a particular share class that would include additional fees (such as 12b-1 fees) that diminish investor returns while boosting profits for the advisor and their affiliated broker.
According to the SEC, starting in January 2014, 1st Global Advisors began recommending clients purchase and hold mutual fund share classes charging 12b-1 fees when lower-cost options of the same funds were available. 1st Global’s affiliated broker would receive the 12b-1 fees on these investments, according to the SEC. 1st Global was under an obligation to disclose this conflict, as it could affect the client/advisor relationship and color the advice they offered.
While recommending these share classes, 1st Global was disclosing the receipt of the 12b-1 fees to clients, but it didn’t disclose the conflicts that arose from making such a recommendation when a more affordable option was available. The disclosures did pinpoint a “potential” conflict of interest, but the commission felt this was insufficient, as there was an actual conflict at play when recommending the share class options.
Starting in April 2018, 1st Global began rebating the fees to clients who’d been paying them, and since then the firm converted advisory account funds held in these share classes into the more affordable share class options in the same mutual funds, according to the SEC.
The SEC claimed 1st Global advisors also recommended mutual funds generating no-transaction fee revenues for its affiliated broker, as well as cash sweep products in which the affiliated broker benefitted from revenue sharing. The SEC also argued the firm hadn’t self-reported its share class recommendation conflicts during the SEC’s Share Class Selection Disclosure Initiative (the SEC’s Enforcement Division has since pursued other firms that likewise failed to report receiving 12b-1 fees after similar share class recommendations).
In settling the charges the firm, Avantax did not admit or deny the findings, but agreed to pay investors about $12.4 million in restitution, along with an additional $2.5 million in interest and $2 million in civil penalties to address the lapses in disclosures. According to Avantax Wealth Management President Todd Mackay, the firm was aware of the self-reporting initiative before acquiring 1st Global and had booked a reserve related to the issue after completing the acquisition.
“While we are disappointed that the SEC demanded a penalty based on conduct that occurred prior to our ownership of 1st Global, we are nonetheless pleased to have worked closely with the SEC to resolve this matter,” Mackay said.