October 7, 2010
To the Commissioners of the SEC
RE: File S7-15-10
I recognize the fees imposed on mutual funds amount to a substantial sum of money each year. However, when this sum is compared to the total sum in mutual funds, its percentage of the total is far less threatening. The same can be said of the Federal Budget. If I had a means of saving $600 million dollars from the budget, while that sounds very large, $600 million as a percentage of the total budget shows its impact is actually very small.
While I submit that the annual cost of 12b1 fees is small in the scheme of things, it does not mean an appropriate review should occur. I am also submitting that the unintended consequence of limiting or removing the 12b1 fee will be far more costly. This potential future cost will be in the form of new commissions, servicing fees, or lost value by the investors due to advisors/representatives dropping them as clients.
I am certain there are advisors/representatives that do little to earn the additional payments of the 12b1 fees. But it is true in any industry there are members of any organization that are poor representatives of their profession. DO NOT PUNISH quality representatives and advisors for the acts or lack of service these representatives provide.
For my practice, the 12b1 fee is treated as a servicing fee for continuing to meet with client/investors who no longer have any additional funds to invest, but need assistance in the management and allocation of what they do have. If a new client comes to me with $50,000, $200,000 or more and those funds are in appropriate investments, if the 12b1 fees are gone or have been limited by prior payments, to what benefit do I have in assisting this prospect? Perhaps their advisor is deceased, retired, moved, or just did a poor job, doesn't this investor deserve quality service without the need to transfer the assets to a new investment just to create a new commission? If the accounts are in mutual funds that will pay a 12b1 fee, or a variable annuity that is also still paying part of the commission based upon asset value, then this prospect can receive my service without the need move their assets just to create a commission.
Does the SEC expect representatives to continue to provide service, administrative assistance, allocation advice, and any other service to clients for NOTHING? Many of my relationships are lasting well past 2-5 years, and many of these clients are no longer investing, but living off what they have already accumulated. How can I keep my doors open to services these individuals if 12b1 fees are removed? It sounds like the SEC is encouraging me to create some type of Ponzi Scheme. Earning enough in new commission on new clients so I can take care of clients who are no longer investing but still need years of assistance and guidance
I am certain not every representative creates a long lasting relationship with their clients, but those who do not, generally lose their clients to those who do. And when the investor moves their account to a new advisor, they should not be faced with having to purchase different securities so the new representative can be compensated.
If the removal of 12b1 fees were to occur, once the fees run dry, what relationship do you expect the investor to have with the advisor? My practice has expenses and it would be difficult to service clients that offer no compensation. Thus, these clients may be turned away to manage their investments themselves. Without professional guidance, many will suffer more in unnecessary losses due to the lack of management and understanding of what to do when the economy changes or when interest rates reverse direction. Many may turn to Registered Investment Advisors and pay even a higher fee for the needed service.
I recommend the SEC truly understand the benefit tens of thousands of investors are gaining from having long term relationships with their advisor and continued service they are receiving which all started from a single transaction perhaps many years before. The SEC should not get on this band wagon just because the amount of 12b1 fees paid annually seems tremendously large and perhaps a gross miscarriage of justice and that no one is benefiting because for most, the relationship with their advisor or the service they are providing is benefiting the investor.
James D. Horn, CFP