May 23, 2004
I wish to heartily endorse the prohibition of 12b-1 fees. 12b-1 fees were originally intended to benefit existing shareholders by helping to increase a mutual funds asset base, thus allowing them to realize economies of scale, which would then allow them to pass on such economies to existing and future shareholders.
The original intention was indeed honorable. However, in reality, 12b-1 fees have overwhelmingly been harmful to investors.
The problem is two-fold:
- 12b-1 fees have largely evolved into just another way of providing a sales commission to mutual fund salespeople. I believe that a sales commission ought to be disclosed as what it is, and not hidden as a distribution fee.
- More importantly, the idea that 12b-1 fees would enable funds to generate important economies, which would then be passed on, has turned out not to occur. SECs own Lori Walshs recent report confirmed this:
The paper finds that that while funds with 12b-1 plans do, in fact, grow faster than funds without them, shareholders are not obtaining benefits in the form of lower average expenses or lower flow volatility. These results highlight the significance of the conflict of interest that 12b-1 plans create. Fund advisers use shareholder money to pay for asset growth from which the adviser is the primary beneficiary through the collection of higher fees.
I believe that it is important that we categorically eliminate 12b-1 fees. This will tend to lessen the extent to which mutual funds violate their fiduciary duties to their shareholders.
Eric E. Haas