June 19, 2007
As an individual who both is paying and has been paid by 12b-1 fees, I'd like to comment as to their often unfair, unnecessary and arbitrary nature.
The fund that is charging me a 12b-1 fee was purchased originally as a no-load, no 12b-1 fee account. When the fund was purchased by another fund company, it was changed to both a load, 12b-1 fund.
As an existing investor I was protected from the load,, but not the 12b-1 fee, since a "vote" was held and with "abstains" and institutions going for management, my "no" vote was overwhelmed, so I had no personal choice in paying a fee I believed unnecessary and useless for me since I have never used or purchased an advisor recommended fund and have never received any special "service" or advice.
I would have sold the fund, but haven't since I lost track of basis. These fees should be eliminated at least for investors who receive nothing for them. Marketing expenses that benefit the fund company should be paid by the fund company.
As a series 7 registered rep, I have sold loaded and 12b-1 fee bearing funds with their "trails" for the rep who sold them. When I left the broker, these trail fees stopped coming to me, the representative who sold the funds, and became just extra, unearned compensation for the broker-dealer. Again the firm wins and the representative (the other little guy) gets nothing and the client gets no more service from his original rep although he is still being charged for it.
Representation that these fees are needed for paying distribution and advisory expenses are obviously not true in the cases I have described above. If these expenses need to be paid , they should be charged for directly to those involved when the services take place and not pawned off on others who are receiving no benefit. Likewise, sales compensation can be paid directly and separate advisory services (if truly provided)can be billed directly also when they are provided.
The current 12b-1 fee is just a slush fund for the broker community paid from the investor with the assistance of the fund company that passes off this cost it should be bearing itself.