June 21, 2007
Once again, it appears that 12(b)-1 fees, the backbone and lifeblood of most financial advisory firms, is under the microscope. Please allow me the opportunity to convey what these fees mean to advisors and their clients.
At the point of sale an advisor receives a commission for the placement of a mutual fund trade, which is used to cover the time spent working with the client to develop and implement an investment plan. The ongoing 12(b)-1 fee is used to cover ongoing services such as:
n Periodic reviews
n Online access to consolidated statements and performance reporting
n Periodic newsletters
n Administrative needs such as:
- account retitling to trusts, spouses, children or beneficiaries
- processing required minimum IRA distributions
- implementing 72(T) calculations / systematic withdrawals
- tracking cost basis and reporting capital gains and losses
- numerous other account maintenance issues
I spend thousands of dollars per year to provide my clients online access and newsletters, not including the staff needed to provide the above mentioned administrative services. In any given year a client may choose to access these services or not, but over time they will have a need for many of these services.
At the beginning of the relationship it is disclosed to the client the method of compensation, including commissions and 12(b)-1 fees. By choosing to do business with the advisor, the client agrees to the compensation structure. If at any time the client feels the service provided is not worth the cost, the client is free to take his or her business elsewhere, and well they should. However, if the 12(b)-1 source of income is denied to the advisor there is little incentive for us to incur the costs to provide ongoing services. In this event both the advisor and the client lose. Many clients might not be able to get access to the professional help they will need to manage their assets through retirement should the fee be eliminated.
It seems the problem that exists at the SEC level is one of semantics. Admittedly the 12(b)-1 fee was originally defined as a distribution fee and has morphed into being a service fee. For over 20 years it has been used this way and seems to be the most efficient way for us to be able to offer the services clients vitally need in today's ever complex financial world. I would suggest the easiest and best solution would be just to change the definition of 12(b)-1.
I believe the government needs to understand that clients choose to work with us because they need help, and they realize there is a cost involved which they have considered and are willing to pay. I strongly suggest you look at all sides of this issue and are able to arrive at a sensible conclusion that does not jeopardize the relationships we have built over the years.
Very truly yours,
Terrence M. Downing, CFP, CPA
Securities offered through Cadaret Grant & Co. Member NASD, SIPC