June 20, 2007
As a practioner of more than 30 years I have seen many changes in the financial services industy, and the creation of 12(b)1 fees occured at a time when front end sales loads were 8.5% on mutual funds. Churning was rampant in the industry and mutual fund sales people were lasting between 3-6 months.
While I recognize Chairman Christopher Cox may precieve that 12(b)1 fees were designed to lower distribution costs, from my perspective within that meaning was nothing less than providing a curb on churning and thereby investor confidence, building service fees to reward long term representatives in the industry, thereby providing much needed stability and to lower the up front entry costs to 5.5% from 8.5% enabiling more Americans to build equity in the markets that was otherwise not available.
While the industry has changed and many of the former mutual funds sales people have become independent registered representatives and investment advisors we have an obligation to continue to service and support those Middle Class Americans who rely upon us to answer their questions and service their accounts as they draw closer to retirement.
Quite frankly none of these small accounts would qualify as a fee based account today, but by removing 12(b)1 fees thousands of independent advisors would be forced to charge the small investor either hourly fees, or asset based fees to compensate for the time necessary to continue to service these accounts.
Many of these investors have had these accounts for 20 years or longer and have never paid directly for advice. In effect they may save a small amount in 12(b)1 fees but they would pay a much larger amount in hourly fees for the same service.
Middle class Americans need the continuing service, guidance and support that are provided by independent financial advisors to achieve their stated investment goals. 12b-1 fees provide a tax efficient means to support the continuing service which these clients require for successful investing. The benefits of 12b-1 fees are numerous and include:
.Expanding Investor Choice - The multiple share classes made possible by Rule 12b-1 give investors choices by providing them with options in how they pay their financial advisor. The flexibility offered by Rule 12b-1 allows financial advisors to tailor a portfolio to their client's specific needs.
.Supporting Financial Literacy - Mutual funds send their investors monthly statements, confirmations, prospectuses, annual reports, and other materials. Financial advisors serve the vital role of educators by helping investors to make sense of these essential materials. 12b-1 fees are the compensation financial advisors receive for these efforts.
.Managing Client Expectations - We all know the common mistakes investors make; buying high and selling low, chasing past performance and harboring unrealistic expectations. 12b-1 fees provide financial advisors with compensation to manage their client's expectations and protect them from falling into this common investor traps.
.Insuring Small Accounts Receive Service - Investment advisory services are simply out of the reach of many small account holders. Financial advisors must have another means of being fairly compensated for servicing these accounts. 12b-1 fees provide the mechanism to insure small investors receive the support and service they need to achieve their financial goals.
.Subsidizing Additional Services - Independent financial advisors offer their mutual fund clients a variety of additional services including: consolidated account statements, periodic portfolio review meetings, quarterly newsletters, cost basis research, preparation of tax returns, and consulting on other financial decisions. These important services are made possible by the subsidy 12b-1 fees provide.
In conclusion, while it is reasonable to review the investor benefits of 12b-1 fees, it is obvious that the repeal of 12b-1 has the potential to cause great harm to thousands of individual investors who need the support and service of a trained financial advisor.
As a result, I urge the SEC to allow Rule 12b-1 or a service fee of equal value to continue to support my efforts to provide needed financial services to middle class American investors pursuing their financial goals.
Mr. Richard L Cox, Sr
Chief Investment Manager
Cox Wealth Management, LLC