July 20, 2007
Although 12b-1 fees may have led to some unintended results that the SEC may determine to be different than what was hoped, may I propose there is a strong positive reason for these fees to remain in place. The burden of complying with the new rules in recent years developed to prevent terrorist interests from gaining access to financial markets has created some interesting financial burdens that 12b- fees help solve.
Although credentialed (CLU, ChFC, MSFS and RIA during an earlier period) to seek and serve the wealthy, I have been licensed for securities for many years and have chosen to serve a clientele of those, both young and elderly, with smaller amounts of assets available to invest. I can afford to do this because of the income I receive from sources other than the sale of investment products. The flow of 12b-1 fees, although not a great amount, generated by a fair number of small accounts offsets to a great extent the constantly rising bimonthly service and professional liability insurance fees that are withheld from my income by my broker dealer.
If 12b-1 fees are eliminated, since I choose to not be fee based (my average client could/would not afford to pay the fee for their small portfolio over an extended period of time) I would retire from the business rather than ignore the needs of the smaller client and join the crowd refusing to serve the small guy.
On average I spend three 2 hour sessions with a new client. The first is to educate, reviewing such fundamentals as how do stocks, bonds, mutual funds, annuities, treasuries and a variety of other investment products work. The second session is spent determining appropriate investment objectives and choosing appropriate investment products. The third session involves providing prospectuses, doing the paperwork and collecting the funds to be invested. To the extent possible even my smallest clients invest at least small amounts (at least $1,000) in up to 10 investments (usually mutual funds) in different investment catagories. Since I do not charge a fee, I only get paid when an investment is purchased.
The investment results for my smaller clients has been generally quite good over the years. The invester is forewarned that there will likely be a lemon or two in the portfolio. When it happens the diversification of the portfolio has almost without exception made up for the lemon's poor performance. Due to my system I never got a telephone call on Black Monday in 1987. By the end of the bear market in October of 2002 I only had 4 or 5 clients that bailed.
Please consider leaving the 12b-1 fee in place. At least in my case I feel it serves the function of providing some renumeration for ongoing service and advice to my clients who usually do not have a continuing stream of income to invest.
Royal Alliance Associates