February 23, 2004
Dear Ms. Wyderko,
Thank you for sending me copies of the proposed forms for brokers to be more transparent in their mutual fund recommendations to clients. I think it is a tremendous step forward in an industry which has been poorly regulated with respect to disclosure of conflict of interest. I have been a victim of this lack of disclosure when I was sold a large volume of Class B mutual funds by a full-service broker. I was not told one word about the large commissions received by my broker-dealer, or about the annual 12b-1 fees received by his company. Although the proposed forms go a long way to inform the consumer/investor, I think it should be clearer about the difference between Class A, Class B, Class C, and bona fide no load mutual funds. These brokers all seem to have the jargon down about how to convince their clients that they are paying the industry average for their mutual funds and fail to mention that it is only the industry average in the universe of loaded funds. Consumers should be aware of other options including true no load funds like Vanguard or Fidelity with low expense ratios. Your forms do not address really address expense ratios. They appropriately mention the fact the broker-dealer may get annual 12b-1 fees which erode the returns, but it is in small print on the back under Asset-based fees. It is outrageous that the broker-dealers could receive 0.25 of your investment annually simply for holding you in certain mutual funds for which they have already received a 4.0 sales commission. Finally, I think it is noteworthy that if ones funds are transferred to another institution, one cannot change the allocation of funds within a family without first selling the funds and possibly incurring a back-end sales load. These broker-dealers will play up the fact that they can swap around funds within a family with no fees, but they fail to mention this benefit may disappear if you transfer the funds away from their institution.
Thank you for the opportunity to make some comments. I applaud you for making the mutual fund industry more transparent to the investor.