July 9, 2007
Dear Ms Morris,
I am writing as a practitioner in the financial services industry regarding regulation of 12b-1 fees in mutual funds. Mostly I want you to understand that like many of my colleagues I actually do support reform of the 12b-1 legislation, in order to make sure these fees are portrayed correctly to the public for what they have become. It can be conceded that the current role of 12b-1 fees for practicioners such as myself, was the result of "unintended consequences" of the original law. However I feel that repealing 12b-1 would be disasterous in terms of the "unintended consequences" that may be cast upon the many financial relationships between the investing public and small businesses (such as mine) that were developed with 12b-1 as a piece of the puzzle.
The financial services industry is going through dramatic changes with respect to the distinction between advisors and brokers. I think this is a good set of changes coming, and I am rapidly re-tooling my personal practice to adapt. However, to dramatically change the compensation model I have built my business on over the course of 13+ years (by repealing 12b-1), I will be forced to make each client relationship decision purely on the compensation arrangement with my client. Many of my clients were and are best served by a brokerage relationship, where my compensation primarily is tied to an initial purchase. However, through 12b-1 fees, I can justify ongoing service to that client without the spectre of constantly needing them to buy a new product or pay me in some ongoing way. Without the minimal ongoing compensation which on a per client basis is usually quite insignificant for both them and me, the "whole" effect of eliminating this compensation from my clientele would leave me with no choice but to ask folks to pay more or not receive my advice. The true loser in this situation at the end of the day is the client with less than $100,000 to invest- as they will become unprofitable to work with.
I think the solid road to follow by the SEC here is for change in the disclosure of these fees. Call them broker service fees or something akin to that, and put a maximum of 50 basis points in place whenever any kind of front load or CDSC is in place for more than a year. I do agree that there are many mutual fund firms, in concert often times with thier sales people (brokers), who are abusing the 12b-1 structure. However I think enforcing the current laws and reforming disclosure will fix most if not all of the problem.
Thank you for your help on this issue!
Dean Ripley
Northwestern Mutual Financial Network
Dean J. Ripley CLU
Financial Advisor
Investment Specialist