March 2, 2004
I am writing in reference to the proposed SEC Rules 15c2-2 and 15c2-3.
I would like to first state that the context of these rules is substantial over 100 pages and an extension of at least 120 days from the current 60-day comment period is imperative to give me time to understand thoroughly how it could effect my business and client relationships.
Over the years the industry has moved away from the large imposing upfront fees and toward asset based fees. This business model allows an advisor to spend the appropriate time with investors to work through their ongoing lifetime investment issues. Advisors must charge for ongoing services and investors must be aware what these charges are, but to eliminate the 12b-1 fee is not the answer. To disclose it for what it is I believe is the answer.
I along with most of my colleagues in the financial service industry believe that there needs to be a clear disclosure of fees and expenses, but it must come in a form that enlightens clients, not something that will confuse them.
I am also of the opinion that many advisors do not do a good job of explaining how they are compensated for the work they do. It is an existing requirement that all investors receive and read a prospectus prior to investing assets. In the prospectus all the fees associated with owning an investment are outlined. Anyone who believes that the average mutual fund investor reads the prospectus prior to investing would be nave. The facts are that all related fees are already disclosed to investors. I believe the only other way to properly disclose the fees would be to put them on the statement for the investor to see each and every time they received their statements.
We provide services both on a commission basis through what are called C shares and on a fee-only basis. The end result to clients is almost identical expenses. Whether we send a bill to the client for our services or we have the vendor in this case the mutual fund companies withhold the money, the net fees to the client are the same.
By using these systems, many advisors like me have built their business model around the revenue generated by the ongoing 12b-1 servicing fees. My commissioned clients understand that I must be paid to provide ongoing service, just as the fee based clients understand I must be paid for my services.
The fees I am referring to end up being a gross revenue stream of one percent or less. I dont know of any other industry that works on a gross revenue stream of 1 or less.
To put this into further perspective I work in a family business with my father, mother, brother and five other full-time employees.
We did a study to determine what effect this bill would have on our practice if passed as it is proposed. We would have to immediately terminate four employees and ask some family members to seek another profession.
If these rules are enacted in the present form, this would devastate the financial service industry, driving tens of thousands of advisors out of business and forcing other investment related companies to terminate hundreds of thousands of employees.
If anything needs to be regulated it should be the licensing requirements to needed to sell mutual funds, currently all a person needs is a series 6 securities license and a series 63. These same people that have meet these minimum requirements are also holding themselves our as an investment advisor or financial advisors. With such a minimum requirements to advise people you are seeing a multitude of people who were selling widgets yesterday now pushing the mutual fund de jour. I believe this is a major problem with the industry today.
I thought the idea of the American economy was one of a free market. This does not sound like one to me
I welcome the chance to speak with you on this issue. If you would like to contact me, I can be reached at 314 786-9000.
Joseph P. Trybula, CFP