May 6, 2004
While I applaud some aspects of what the SEC is trying to accomplish, I feel that the complete removal of 12b-1 fees would be a detriment to many consumers and thus harmful to the overall securities industry. The removal of 12b-1 fees would be especially harmful to the smaller consumer.
As an investment advisor myself, I normally charge approximately 1 percent to my clients for assets under management up to 250,000 with a declining charge thereafter. However, the initial minimum amount of assets needed to open an advisory account is 50,000. Any account opened with a balance under 50,000 is opened as a standard brokerage account. Although some brokers may feel differently, I try to treat all of my clients with the same basic levels of service whatever their account balance may be. In order to provide a basic level of service for my smaller accounts, I need to receive some level of ongoing compensation. The 12b-1 fees that I receive help me to provide these services and thus are beneficial both to myself and to the consumers that I serve. 12b-1 fees, in this regard, are no different than renewal commissions paid on insurance products for continuing service by insurance brokers. Also, 12b-1 fees for C share accounts bring my smaller accounts onto a level playing field with my advsisory accounts. I use C share accounts in my practice because it makes my job of rebalancing client accounts more cost effective for the client when rebalancing amongst several fund families.
I read in your proposal that you feel that 12b-1 fees are used to buy shelf space. I do not understand why this is necessarily a bad thing. I form relationships with the clients that I serve and with the fund companies that I use to service my clients. The relationships that I form with the fund companies help me to better serve my clients. It would be impossible for any advisor to use every fund company in their practice. We have to make choices about which fund companies we will use and which ones have the best products suited for our customers. My reputation is on the line based on the choices that I make for my clients. Therefore, I need to feel comfortable with the choices that I make and with the relationships that I have developed throughout the years.
While I do realize that there are more issues than the ones that I am presenting, I just wanted you to be aware that abolishing 12b-1 fees altogther without applying some form of continuing compensation for the brokers would be a detriment to the brokerage community and to the large numbers of consumers that we serve.