October 20, 2010
I support 12b-1 fees for the following reasons;
1. Smaller investors typically do not qualify to use professionally managed accounts. Typically the minimum amount to invest must be at least $25,000. Therefore to compensate the advisor for providing advice to a smaller investor, the 12b-1 fee is an ideal compensation model.
2. Fees for ongoing advice and service; When a client is fiorst invested in a mutual fund portfolio there is a upfront comission payable to the advisor. This comission compensates the advisor for doing the initial due dilligence with the client to discover their risk tolerance, investment goals, and to complete the paperwork to get the account set up. After the initial account set up the 12b-1 compensates the advisor for ongoing portfolio rebalancing and monitoring. After the cllient becomes a client--thats when the work really starts in assisting the client with ongoing financial advise. The client expects the advisor to pay for an office, staff, new technology, etc.
3. Is price and fee the key determining factor as to weather a client is sucessful with their investment objectives? I notice alot of concern over comissions in the delivery of financial advice. If you needed heart surgery, would your first priority be what comission the doctor receives for performing the operation. It could be argued that you would want the most highly compensated heart surgeon. Likewise in financial planning is the advisor who charges the least the better financial advisor?
4. How should an advisor who serves middle class america be compensated? I doubt the client wants to write a check for advice. Making the client aware of the 12b-1 fee so they can make an informed decision is fine. Eliminating the 12b-1 fee is going too far. Currently the client is provided a prospectus when they purchase a mutual fund and this prospectus outlines the fees and 12b-1 charges. Most clients just want to know that you have their best interests in mind. The client is not unhappy with an advisor earning a living and keeping the office lights on.
5. If FINRA believes that 12b-1 fees are a poor model of compensation for advisors, maybe you could sugges other options to compensate an advisor for the services they provide.
Mr John Hance