July 30, 2010
Although, I acknowledge, not all advisors work the way I and my staff do, the current 12b1 structure allows me the ability to manage my clients accounts at a lower cost to my them than a full fee based plan would. The fee based structure is a more expensive platform on my side with greater legal hurdles to take on which increases my compliance and paperwork over what is used in the 12b1 design. I have both type of accounts, but the fee based really only works well for the more wealthy client with a larger account because if becomes more cost effective. I service my clients the same way with either design, and I and my staff actually do manage those accounts. Much of what we do is utilizing the C-share, or level load structure of funds. If I stay within the fund family, I can exhange funds any time with no additional cost to the client. Likewise, if I wait at least 12 months, I can also exhange funds (sell and buy), between fund families with no added cost to the client. This way I am paid a "fee" for managing their portfolio and it puts me on their side. If the account grows, so does my income. If it declines, so does my income. This structure also allows us the greatest flexibility in fund choice. I can choose the best fund for the situation and I am not limited to one fund family, so overall plan design can be better. But because I don't have the added expenses of a fee based platform, the added charge of the extra c-share funds ranging from a low of .40% on a bond fund, up to as much as .80% on an equity fund, my client saves money in the process.
Even if I use a traditional A share to fund a contributory Roth IRA, the cost to the client is small over time. I still service that account. I still make recommendations to reallocate funds on our reviews (WHICH I DO) Limiting those fees will force more representatives to move to a true fee model. The biggest problem with that is an added cost, particularly to more moderately sized accounts which is really where any A or C share classes will be sold anyway. Even worse, it will eliminate many options for the smallest accounts. Current advisors servicing the small investor will be forced to stop accepting those accounts and concentrate their efforts on larger accounts exlusively. That will hurt the people that need the help the most, the small investor.