Subject: File No. DF - Other Initiatives
From: Scott A Cracraft, Sr.

September 13, 2010

I wish to comment on the proposal to limit 12b-1 fees to 25bps per year. Since starting in this business 20 years ago I have seen many changes in the fee structure and number of different class offerings of mutual funds. Many years ago I decided to utilize the C share class of funds for my clients. For my wealthly clients I utilize separate account managers. The reason I chose to use the C share class is because the A and B share classes impose high entry and/or exit fees. Since the average hold of a mutual fund today is 27 months the C share class is actually the best and least expensive class for the average mutual fund shareholder. I recommend funds that pay trails anywhere from 10 to 100 basis points depending on the type of fund and the fund family. The clients are told that my compensation comes from the 12b-1 fee. This arrangement is easily understood and is very efficient. If you cap the 12b-1 fee at 25bps it makes the advisor/client relationship unprofitable for small accounts. I could wrap them and charge for the advice but that would actually result in increased fees for the client. The current arrangement works well and I think should remain in place. You may wish to change the term from 12b-1 to "ongoing sales commission" or some similar term. I fear that in the name of trying to help the consumer you will actually drive up the cost to the consumer much like the recent credit card bill has increased costs for all credit card holders.
When you take into account that the average advisor gets paid about 40% of the fees charged ( the broker dealer takes the other 60% ) a $100,000.00 account invested in C share funds with a 1% 12b-1 actually only compensates the advisor about $400.00 per year before taxes.
I don't believe that is extreme.If you limit the 12b-1 to 25bps that same $100,000.00 will only compensate the advisor $100.00 per year which is certainly not worth the effort. No one seems to think that tipping a server 15%-20% is extreme but somehow paying 1% per year for financial advice is. Please reconsider your proposal to cap 12b-1 fees.


Scott Cracraft