July 19, 2007

I am a licensed insurance professional and mutual funds salesperson.

In return for on-going service, I recieve the 12b-1 fees as ongoing compensation. On a $10,000 investment, this turns out to cost the client $25 per year.

My fear for this new legistlation is more for the average client than the advisor. A few years back, it was made illegal for mutual fund companies to subsidize trades. The trade off is that the minimum investment went from $50 per month to $250 per month. Otherwise, the transaction would net negative money to the advisor.

The real problem is that a large segment of the population gets tossed aside when some of this legistalation goes through. In the trade subsidizing case, it made it so only people who could invest at least $250 per month to EACH of their investment accounts (non-qualified, Roth, etc.) could afford to work with an advisor.

As far as 12b-1 fees are concerned: I think it is fair compensation for the advisor and a great value add for the client to have a professional guiding them.

If this legistlation passes, it will hurt advisors in the short term, but the long term ramifications will be much more harsh for the clients. Clients will get charged much more for the same service they were recieving before. (Good advisors provide good service already with only 12b-1 fees as the compensation.)

Moreover, this will be another step in widdling down the numbers of our population who will be able to afford to work with an advisor. ($250/mo per account PLUS a seperate annual service fee)

However, I do think the 12b-1 compensation should be stated clearly on client statements. Full disclosure is the right thing to do. It is just that changing the comp structure to seperate service fees specifically will do more harm than good for the average investor.