March 15, 2004
Jonathan G. Katz
File No. S7 09-04
Dear Mr. Katz:
As requested by the Commission for public comments on IC-2356 "Prohibition on Use of Brokerage Commissions to Finance Distribution", I am submitting my views on the need for the Commission to make additional amendments to Rule 12b-1.
Specifically, if the Commission rescinded rule 12b-1, the question posed is, "what would be the consequences for funds, fund shareholders, fund advisors, and brokers that sell fund shares?"
In addressing this question, my views are based on more than 15 years of experience offering mutual funds to my client base valued at 47 million dollars. For the past ten years I have been securities licensed through Investacorp, Inc., a registered broker/dealer and member of NASD/SIPC. My comments represent my views and not necessarily the views of my broker/dealer
Contrary to the comments by personal finance writers, I believe elimination of 12b-1 trailing commissions would do major harm to those investors needing ongoing investment planning advise and counsel. A significant majority of my clients regularly expect our office to be available and to respond quickly (without being directly charged on a time or project basis) with answers to questions like these:
"What changes are needed now in my portfolio due to a major change in my employment situation, new family member, divorce, death of spouse, college expenses in the near term, or a major new purchase, etc.?"
These are just eight samples of hundreds of client questions the 12b-1 trailing commissions help NASD registered brokers to be compensated for providing ongoing investment advice and counsel. Does the Commission believe brokers should only be compensated on a fee-for-service basis for helping clients with ongoing advice and counsel?
I have never received comments from my clients objecting to the small annual trailing commission percentage they are charged by mutual funds to help them in addressing their various investment planning questions. They expect brokers to be compensated for helping them achieve their financial goals over the long term.
In my opinion, without trailing commissions, financial advisors would be forced to shift to a different (and potentially more expensive for clients) compensation model for ongoing investment planning assistance for our mutual fund clients. If some clients resist that approach to ongoing compensation, I believe brokers would begin to resist responding to some client investment planning questions that may not generate revenues. Another potential consequence of amending the current 12b-1 rule, brokers may significantly increase the switching of investments among various leading mutual fund families (churning the portfolio.) In other words, for some brokers the primary focus of their practice could shift to a transaction-driven business model. In essence, brokers of mutual funds may be forced to become "trading desks" with their clients left to making optimal ongoing investment decisions.
In rescinding rule12b-1, there may another long term consequence for the clients of those brokers nearing retirement age. I believe if there is a significant reduction in broker income it may lead to brokers retiring early from the business and leaving their clients to find someone else. A new broker will of course be under pressure to make investment changes in order to be fairly compensated if there are no 12b-1 trailing fees. Keeping the current fund family investments and potentially making just minor fine tuning adjustments within the existing fund family's alternatives would produce little revenue. The new broker may propose a major overhaul of the portfolio holdings. The investor would most likely be in a quandary as to the best course of action.
In sum, I recognize that over the nearly 25 years since the 12b-1 rule was established, the fund industry may have evolved differently than the Commission had expected. I believe, however, that millions of investors have received significant investment planning benefits and that at the current level of annual fees my clients are willing to pay for access to a myriad of professional ongoing investment planning guidance. I believe the current 12b-1 fee structure has helped millions of mutual fund investors to make optimal investment decisions and thereby increased the odds of achieving their long term personal financial goals and objectives.
The vast majority of my clients seem to have a major dislike for dealing with detailed investment matters, or they feel the marginal benefit to do the homework is simply not worth the time needed to find the information. I worry that the individuals the Commission is most interested in protecting may do great potential harm to their financial situation. I urge the Commission to not rescind the current rule 12b-1 that provides for a trailing commission arrangement.
Thanks for your consideration of my comments.
Robert H. FitzSimmons, CFP