SEC Charges $500M RIA Firm Over Mutual Fund Picks

A $500 million advisory shop is facing charges after the Securities and Exchange Commission said the firm systematically picked pricier mutual funds in beach of its fiduciary obligation to clients.

The SEC announced charges against Kansas City, Missouri-based Buttonwood Financial Group and Jon Michael McGraw, the firm’s president, chief compliance officer and majority owner.

The regulator claims that over the course of at least five years, Buttonwood invested client assets in generally more expensive share classes of certain mutual funds in order to avoid paying certain transaction costs.

The vast majority of Buttonwood’s advisory clients were in wrap accounts, and as part of the wrap fee agreement with clients Buttonwood had agreed to pay all client transaction costs, according to the SEC’s complaint filed in the U.S District Court of the Western District of Missouri.

From at least 2014 until 2019, Buttonwood and McGraw aimed to dodge the added expense to the firm by using no-transaction-fee funds available through an unaffiliated broker, according to the complaint. But these NTF mutual funds generally bore a higher cost to clients than other share classes of the exact same funds for which Buttonwood would have had to swallow the transaction expenses, according to the complaint.

Furthermore, in November 2016 McGraw initiated an agreement with the unaffiliated broker by which Buttonwood committed to investing no less than 60% of client assets in NTF mutual funds. In exchange, the broker waived transaction fees on client trades in mutual funds or equity stocks that Buttonwood would have otherwise paid, according to the complaint.

The SEC alleges that neither Buttonwood nor McGraw disclosed the details of the agreement or financial conflicts of interest to clients. Moreover, they violated their fiduciary duty by choosing the more expensive mutual funds when the lower cost share class of the same mutual fund would have been better for clients, the SEC claims.

The SEC seeks permanent injunctions, disgorgement with prejudgment interest and civil penalties, according to the complaint.

Buttonwood has more than $510 million in client assets across approximately 2,000 accounts, according to its most recently filed Form ADV. According to a wrap fee brochure filed in August 2021 its wrap fee program fees cover advisory services and transaction execution.

Buttonwood’s August 2021 also indicates that the firm uses the Charles Schwab as its primary custodian. Buttonwood’s A current pricing structure with Schwab waives most equity, ETF and mutual fund transaction fees for clients, the filing indicates.

In July, the SEC said in a risk alert that it had conducted more than 100 examinations of advisors associated with wrap fee programs. This included advisors who served as portfolio managers in, or sponsors of, wrap fee programs and advised clients’ accounts through one or more unaffiliated third-party wrap fee programs, according to the risk alert. The examination revealed problems with how firms monitor trades, handle conflict and justify fees, FA-IQ sister publication FundFire reported at the time.

This isn’t the first time the SEC has charged firms for issues related to wrap fee programs.

Pruco Securities, a unit of Prudential settled with the SEC to pay $18 million for claims that it failed to properly disclose share-class overcharges and revenue-sharing payments. FA-IQ sister publication Ignites reported. This included nearly $16 million in disgorgement and interest and a $2.5 million fine to settle claims that Pruco did not properly disclose that it received 12b-1 fees or revenue-sharing payments on mutual funds and cash-sweep options in its wrap fee programs, Ignites reported at the time.

Pruco also allegedly recommended more expensive shares of some mutual funds when lower cost share classes of the same fund were available, according to Ignites. Voya Financial Advisors agreed to pay $22.9 million on account of allegations that it recommended share classes with 12b-1 fees when lower-cost options were available, Ignites also reported.

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