June 18, 2007
I have been the President of a small Broker/Dealer that has been a member of NASD since 1986. Prior to that I was a District Manager with a national brokerage firm. I remember when the 12b-1 fees were adopted. The highest sales loads at the time were 8.50%. The loads to get into the funds were reduced, and the 12b-1 service fees were incorporated. At the time, I remember thinking this would help to provide ongoing service of small and large accounts because there was now income coming in to cover some of the overhead. Before the 12b-1 fees the brokerage industry was only getting paid on new money coming into a firm.
The fees have helped to stabilize the industry and allowed registered representatives to service all accounts, large and small. The smaller clients would be affected the most if there were a change in the current fee structure. The financial industry provides a number of ongoing services such as address changes, setting up systematic withdrawals for IRAs, nonqualified accounts, and beneficiary changes. There is also the periodic review of the clients portfolio that the current fees help to cover.
The mutual fund industry distributes the fees in the most efficient manner possible. They have access to all the accurate valuations of an investors account and pay the 12b-1 fees directly to the Broker/Dealer of record, who distributes them to the individual representative who services the account. This process is efficient and cost effective, no need for thousands of firms setting up accounting systems to collect fees on hundreds of millions of accounts.
We have the best and most efficient securities system in the world that is all inclusive. Whether it is the small or the large investor we want everyone to be able to participate. By the end of the 80s there was still less then a trillion dollars in mutual funds: today there is over 11 trillion dollars. Can you imagine trying to service the estimated 300 million client accounts without any service fees? The 12b-1 fee continues to be an efficient and cost effective way to meet our clients needs.
Joe Giordano, CFP