May 30, 2007
To the SEC Roundtable Board meeting On June 19, 2007:
There are many aspects of the 12b-1 fees that have been integrated into the compensation an advisor/broker receives that must not go unaddressed. This is the compensation that an advisor earns in exchange for services before, during, and after the initial mutual fund investment. In particular is the 12b-1 use of B and C class shares.
The SEC must address the elimination of allowing 100% of an investors money deposited into an investment account thereby harming the small investor. In the case of B and C shares, 100% of the clients initial investment goes into their account. The trade-off is that over the years that follow the initial purchase, an additional percentage (commonly 1% per year) is added to the total expenses under the now disputed classification 12b-1 to compensate the fund for its payment to the advisor/broker who directed the investment. While I do agree that the classification used to define this might not be semantically accurate, it would be a disservice to investors who need and/or desire the use of a financial broker/advisor to eliminate this fee because of the following:
1) Most financial and insurance vehicles sold by regulated brokers and advisors do have some form of post-sale compensation to allow the broker/advisor reimbursement for efforts relating to advise, account servicing, communication and maintenance. In our industry we categorize this as 12b-1. However eliminating this source of compensation to a broker/advisor will not only hurt the small investor who normally would not be serviced, on an on-going basis, by an advisor, but also burden the respective mutual fund company who will now need to provide this service and ultimately pass on the cost in some manner. Due to the know your customer rule, some of the discussion by the fund companies must be limited in scope thereby harming the investor.
2) The inherent accounting fiasco in trying to grandfather existing accounts opened under prospectus disclosed expenses if such 12b-1 expenses are eliminated or restricted. How will you now compensate the mutual funds that have already paid out B share commissions for which the fund companies are still recuperating those payouts? There is no debate that B shares encourage long term investment due to the inherent costs of exiting the investment family prior to the expiration of a set amount of years.
3) The C share which typically pays an on-going 1% trailer on the value of the investors account, allows the advisor the same opportunity available in the asset-based managed accounts without the need of a middleman or third-party servicing. Again, this is paid through the now disputed term, 12b-1 expense. These accounts allow the smaller investor (e.g. less than $100,000) the ability to participate in an asset-based product that, over the years, compensates an advisor more as the account goes up in value and less as it comes down in value. This builds a long-term goal of investing by encouraging relationships that stay informed, educated and serviced.
4) Finally, for the large investor ($1,000,000) even the A share and its 12b-1 structure is the most cost-effective. At this level most load funds allow this $1,000,000 to purchase shares at a 0% front-end load (also known as net asset value) and have the advisor take a smaller 12b-1 fee (typically 25 basis points) in lieu of a more traditional asset-managed account which could cost 1% or more per year.
The existing 12b-1 fees DOES offer a direct and significant marketing effect by allowing brokers/advisors the ability to continue operating their business of promoting mutual funds on an on-going basis to investors with different needs. Particularly, the need for the small investor (e.g. less than $100,000) the ability to access an advisor who might consider the B share or C share more advantageous to the client than the A share. Eliminating the 12b-1 fee will effectively cease the ability to offer these shares to current and future investors thus eliminating the exact marketing venue the 12b-1 fees were originally designed for. If for definition purposes such terminology (12b-1) needs to be readdressed and defined under a different term (e.g. service fee, trailer, advisor) then I support your goal of addressing this issue as long as the final compensation structure is not changed, altered, or eliminated.
Thank you for your time and attention to this matter.
Oren Peretz, Branch Manager- First Allied Securities, Inc.
NASD/NYSE Arbitrator/Mediator
(818)905-1224