/fee-disclosure

name: fee-disclosure
description: "Evaluate whether the substance of fee and cost disclosures is complete, accurate, and not misleading across advisory, brokerage, fund, and retirement plan contexts. Use when the user asks whether Form ADV Item 5 fee content is adequate, prospectus fee table format, Reg BI cost disclosure content, 12b-1 fee transparency, revenue sharing arrangements, wrap fee program cost-effectiveness, or ERISA 408(b)(2)/404a-5 fee disclosure content. Also trigger when users mention 'hidden fees', 'total cost to the client', 'are we disclosing all layers of fees', 'expense ratio comparison', 'fee billing in advance vs arrears', 'share class selection', or 'indirect compensation'. (For which disclosure documents must exist and when they are delivered, use client-disclosures.)"

Fee Disclosure

Regulatory status current as of June 2026 — verify effective dates, dollar thresholds, and pending rulemakings against current SEC/FINRA/FinCEN sources before advising.

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