July 28, 2010
1) Virtually all mutual funds (with the notable exception of Vanguard funds) exist not for the benefit of fund shareholders, but for the benefit of the fund sponsor, who is also typically the fund advisor.
2) As the fund sponsor/fund advisor are the entities to benefit from increased fund assets, they should certainly be the ones to bear distribution costs. It doesn't make sense for existing shareholders to bear the costs of distribution which are designed to further enrich the fund sponsor/fund advisor. That paradigm amounts to a "Heads I win, Tails you lose" proposition in which the fund shareholder is the loser.
3) The argument that "ongoing services" provided by intermediaries need to be paid from fund assets is specious.
- To quote William Bernstein, "The stockbroker services his clients in the same way that Bonnie and Clyde serviced banks."
- While there may be a very small minority of commissioned salespeople behaving as objective fiduciaries on an ongoing basis to their clients, the overwhelming majority of them appear to be commission-crazed salespeople who wouldn't mind "selling a refrigerator to an Eskimo." Thus, the "services" which ongoing 12b-1 fees subsidize are, at best, nothing, and at worst, continuing sales pitches intended to generate more commissions for the salesperson. Not only is this sort of "service" not valuable, but it doesn't make sense for a consumer to pay for it in any way, shape, or form.
- The need to, for example, pay a mutual fund supermarket to distribute one's funds is a cost that need not be borne by fund shareholders. For example, Vanguard funds don't pay such fees and still are available (albeit with a usually modest transaction fee) in mutual fund supermarkets. Thus, the funds would be forced to stand on their own in competing for assets. If a consumer doesn't want to pay a modest fee to utilize the value-added of a mutual fund supermarket, they can typically avoid such fees entirely by buying directly from the fund company.
- Even if salespersons were providing ongoing advisory services, why should current fund shareholders be forced to subsidize those services? It would make much more sense to completely "externalize" said expenses (i.e., deduct them directly from shareholder accounts rather than from fund assets). This would allow the fees to be dramatically more visible to the average investor. It would allow providers of said "services" to set their own fees for those "services". This might better inspire competition, both by the price of the fees and the nature and extent of services provided in exchange therefor.
In summary, I propose completely eliminating 12b-1 fees and completely externalizing all such distribution and service fees.
Eric E. Haas
Chief Investing Officer
Altruist Financial Advisors LLC