August 2, 2010
I believe the SEC is looking at 12b1 fees from a narrow perspective. At first glance the proposal seems reasonable, an effort to reduce fees for investors. However it ignores the positive results for the ongoing financial advisor client relationship that 12b1 fees generate.
After the initial sale of a Class C share mutual fund to a client the financial advisor has no potential conflicts with that client's interest. He or she is compensated as a percentage of the assets in the mutual fund, not for the number of transactions done. The more successful the fund is for the client, the more the advisor is compensated. Since the advisor is, in effect, on retainer, his or her only incentive is to monitor the investment and insure that it continues to meet the client's objectives. If the fund underperforms, or the client's objectives change, it can be easily changed usually with no sales fees to the investor.
I have found C share mutual funds with 12b1 fees to be an excellent tool for accounts smaller than $100,000. These accounts are usually unsuitable for individual securities like stocks. However with the C share mutual funds the client gets professional management and diversification.
I encourage my clients in this category to call me with any questions relating to their financial plan whether it concerns assets held by me or not. I believe, as do my colleagues, that the client is entitled to this ongoing advice because he is paying me in the form of the 12b1 fees. In fact I don't know of anyone in my profession who does not believe that a client is entitled to ongoing financial advice if they are paying 12b1 fees.
If 12b1 fees are eliminated this retainer relationship with
the client is destroyed. The broker will only be compensated when a change is made in the mutual fund. This is a recipe for conflict and could encourage excessive transactional business.
I am a 28 year veteran financial advisor with approximately $100,000,000 in customer assets under management. I have never had a customer complaint filed against me and I use C share mutual funds with 12b1 fees extensively.
I strongly encourage the SEC to not just look at the fees in a 12b1 product but how those fees strenghten the financial advisor/client relationship and help the client reach their long term objectives.
Thank you for your consideration.
William Davis, CFP (TM)