May 22, 2008
Dear Mr. Cox:
Please accept this letter with regard to the Future of 12b-1 Fees in Question.
In June 2007, SEC Chairman Christopher Cox announced the review and possible elimination of 12b-1 fees. I was told that his plans are to sweep this issue under the rug.
12b-1 fees are costing middle america hundreds of thousands of dollars over there lifetime. Does the SEC want to help the Broker/Dealers ignore these costs? Is it possible that the SEC is aiding the broker dealers in there quest to mis-inform and often times give their clients misinformation about these cost?
Let me step back a minute and make something perfectly clear! A broker should in fact earn compensation when the advice leads to increase in wealth for the client, while at the same time this right that 12b-1 fees give the broker should also be equally charged back to the broker when the accounts drop in value. Why is this "cost chargeback" already in place?
In addition the broker should be liable for showing a cost recover plan for the cost of the 12b-1 fees. For example:
The client has bought a mutual fund and the mutual fund has a 12b-1 fee $625.00, lets say the tax on this account is $1,875 (short term capital gain tax) and the Dividend paid tax is $1,125. The clients initial cost for this fund to over $3,625, the opportunty cost for the 1 year over his client 25 year life span compounds out to $12,275.54.
My point in reviewing these numbers is that a broker should in fact have a compensation schedule that is truly performance and cost recovery based. Every one of the broker/dealers I have been associated with(I am a broker myself and hold several securities licenses) does not want these cost exposed. Can you tell me why these Broker/Dealers do not want these opportunity cost explained to these middle class americans? It seem rayther patheic that these B/D's are trying to tell you they care about these investors! Can you send me the information that the Broker Dealers have sent you with respect to there support of the 12b-1 fees?
I have read that many of these Broker/Dealers have said that doing away with 12b-1 fees would have unintended, yet devastating consequences for the small investor. Quote-- "The reason is simple: Financial advisors might then be forced to charge these clients additional fees for their services—fees that they very well might not be able to afford".
Listen to what they are saying--if we (Registered reps) bill them for services, they can't afford it, so lets just withdraw fees out of their account automatically. Where is the due diligence on this investor?
They go on to say: "The result could be a financial meltdown for small investors, suddenly trying to make fiscal decisions on their own". The meltdown tactic they are trying to scare you with surely comes at a cost of "TRUTH". Changing the Broker/Dealers unique business model and applying regulations that would inforce Broker/Dealers to disclose true cost of their products could benefit the small investor. Is it possible that the meltdown the B/D's are so concerned with would be at the Broker/Dealers profit margin, not the investor? Does the SEC want to help Broker/Dealers in hiding the TRUTH? After all doesn't the SEC want to disclose the truth about these products and costs!
Please don't fall to this pressure, pull this issue out from under the rug and proceed with action that applies TRUTH with 12b-1 fees and the full disclosure of these cost!
I would appreciate a timely response to this email. Thank you so much for your time.
Tim H. Cooper, CRFA