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Investor Protection

Advisory Clients Would be Outraged by Double-Billing

June 4, 2020

[Photo: Seinfeld's George Costanza in 'Double Dipping' Episode] 


by Howard Haykin



Advisory clients would be outraged if they knew they were being double-billed for services rendered by a registered investment adviser (an “RIA”). But what if they didn’t know? What if one of the billings was neatly tucked away in the expense ratio of a mutual fund that advisers had purchased for their account  ...  every year for the life of that investment?
Thank goodness there's the Securities and Exchange Commission, which caught Ambassador Advisors LLC and its management team.



Ambassador Advisors LLC is an RIA that at one time managed nearly $500 million for 4,300 client accounts. Bernard Bostwick, Robert Kauffman and Adrian Young are joint owners and executives of Ambassador Advisors LLC, and they serve as registered representatives of a broker-dealer, American Portfolios Financial Services.



DOUBLE DIPPING NOT PERMITTED.    From August 2014 to December 2018, Bostwick, Kauffman and Young utilized their positions at Ambassador Advisors to deduct advisory fees from clients’ advisory accounts. And during that same period, they utilized their association with American Portfolios to earn 12b-1 fees on mutual funds they bought for their clients' accounts - - - when lower-cost share classes of the same funds, without 12b-1 fees, were available to the clients. 


12b-1 fees (or ‘trailing commissions’) … are annual fees that a mutual fund pays to brokers, theoretically as encouragement for them to market the fund and bring in more investors. The idea is that by expanding the number of shareholders and the amount invested, the fund's expense ratio would fall – benefitting both new and existing investors.


According to the SEC complaint, the Defendants violated their fiduciary duty to advisory clients by:

  • failing to disclose their inherent conflict of interest in these transactions – i.e., they chose to put clients into investments that offered lower returns in order to generate additional revenue for themselves.
  • failing to seek best execution for clients’ mutual fund transactions by causing clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds were available to the clients that didn't charge 12b-1 fees and presented a more favorable value under the circumstances.
  • failing to adopt or implement effective firm policies and procedures designed to prevent these violations.



INVESTOR TAKE-AWAYS.    A troubling aspect of this case is that advisory clients had no way of knowing they were being cheated - i.e., effectively double-billed. ‘Sneaky’ 12b-1 fees are often tucked away in a fund's expense ratio, making it hard to find and even harder to track. Aside from that, mutual fund investors often find it difficult to understand commission charges (both front-end and back-end loads) as well as the various fund expenses needed to maintain the portfolio and operate the fund. For those and other reasons, more and more investors these days choose to invest in Exchange Traded Funds – particularly when seeking an investment vehicle that tracks stock indexes.  



[For further details in this case, click on … SEC Litigation Release and SEC Complaint.]