July 19, 2007
Costs are an important consideration when making an investment decision. Full disclosure and the ability to compare costs of various alternatives is necessary. However, costs are just part of the story.
For many people, help in taking action and staying on course is also critical. Some people know what they should do, but they don't take action due to procrastination. Other people become overwhelmed with information and choices, so they fail to act. Other people let greed and/or fear influence their decisions, so they hurt themselves by chasing past performance.
Competent, honest, caring financial professionals provide on-going help to clients by encouraging them to take action and stay on course. In many ways, financial professionals act like coaches and at other times they act like therapists. Creating financial security and achieving goals does not just happen by itself. Most people need help from another person.
Many mutual fund and discount brokerage firms recognize that people want help from a professional. These firms have expanded their business models so that they can provide one-on-one relationships with their investors. The increase in fee-based business is an indication of client's desire for help and willingness to pay for help on an on-going basis.
One of the fairest, most cost-effective methods of compensation is through the use of 12b-1 fees. An investor can receive help from a financial professional for a low quarterly percentage charge at the fund level. The financial professional receives compensation and the client knows that they have someone that can help them with their account. Typically, the financial representative addresses many questions and topics beyond just the specific account, thus adding more value and services for the client.
Alternative methods of compensation such as charging fees at an hourly rate, flat fee or percentage of assets can be appropriate if the client needs advisory services. These clients tend to be of higher net worth and require more of the professionals time and service. Clients that have lower net worths still require help and fee-based services are more costly or are unavailable because the client does not meet the minimum account size requirements. Even higher net worth clients might prefer to invest without an advisory fee structure , but still want the on-going services of a professional to help them with their investment account. Therefore, the 12b-1 fees can provide a form of compensation to the financial professional that is cost-effective for a variety of client needs.
For these reasons, I urge the SEC to reject any proposal to eliminate or restrict the payment of 12b-1 fees to registered representatives for providing continued service to their clients. Renaming and clarification of the purpose for the fees would be helpful to all parties.
Thank you for your consideration of my views on this subject.