NEW YORK (CNN) - When your stockbroker recommends a mutual fund for you to buy, does he or she have a vested interest in that advice? One of the dirty little secrets of the business is that brokers do indeed. Some mutual funds pay them higher commissions than others do for selling their products.
Now a broker may very well think one of those funds is really the best one for his client. That's fine. But should investors know about the higher payments?
I think they should.
And the National Association of Securities Dealers agrees. The NASD. has just proposed a new rule to do just that.
Right now, brokerage firms and mutual funds do have to disclose the commissions they charge. But they don't have to say how those rates compare to payments by others. Without a basis of comparison, the investor doesn't know if a broker might have a hidden reason for pushing a specific fund.
The NASD also wants brokerage firms to disclose the payments they receive from mutual fund companies to include their funds among the menu of those the firm offers. That's a Wall Street equivalent to the payments that consumer-goods companies make to supermarkets to obtain shelf space. The difference is that supermarkets don't have salesmen lurking behind their shelves to push those favored products.
The NASD proposal is part of a series of actions seeking greater disclosure by mutual funds of how they operate and the charges they make, including management fees,
The new proposals will be open for public comment, and must still be approved by the Securities and Exchange Commission.
The commission, along with other regulators and consumer groups, contend that mutual fund buyers are generally less sophisticated investors who need more protection and disclosure than they've received in the past.
Last month, a House committee approved a bill asking the SEC to require more disclosure of both mutual fund management fees and broker incentives.
That congressional action and the NASD's proposed new rules are steps in the right direction. However, they should also make sure that the additional information to be disclosed is not buried in obscure boilerplate verbiage, but is provided in a fashion that ordinary people can understand.