July 28, 2010
Having read much commentary on the proposed changes to 12b1 fees, and how they impact customer choice and service levels customers expect from advisors, I note that most commentary misses an important point. That point is the customers ability to change his/her mind. I deal with many clients who have purchased mutual funds, then changed their minds and want to take a different approach. If they have purchased A shares, the commission has all been paid to the salesman, and the customer will never see that money again. If the customer purchased B shares, ditto due to deferred contingent sales charge. If the customer purchased C shares, and changes his/her mind, the customer is out AT MOST 1%, and that only for 12 months following the purchase. If there is one great truth regarding investor behavior it is this: Customers change their minds.
I am a firm believer in fiduciary standards, I believe in doing what is best for my clients. I do NOT believe it is always in my clients best interest to handcuff them to a particular product, or even to handcuff them to ME If I do not serve the client who I sell C shares to - he will find another advisor who will take over the account. If I sell A or B shares and I do not service the client, he has a choice of eating the sales charge and paying another sales charge to another advisor or suffering through my poor service and advice.
Yes, over a lifetime, a customer will pay more for C shares than they will for A shares. HOWEVER - many clients will want to change investment advisers, or change investment companies - I do not think a majority actually keep the same funds (or the same advisor) for a lifetime. Proposed rules should consider the value that flexibility of C shares brings to the clients/advisor relationship. In short, C shares make it much cheaper and less painful for a client to "fire" an advisor, or move to a different investment strategy.