April 12, 2004
I am commenting on proposed rules 15c2-215c2-3
I feel that these proposed rules will have many unintended consequences. Which include many brokers being forced to leave the business and hurting the smaller investor by eliminating resonably priced advice to them.
The 12b-1 rule allows brokers to receive a servicing fee on mutual funds. I have no problem renaming this as a broker servicing fee, in fact I already disclose that to my clients and they have no problem with that. However if it is deducted separately and dicslosed on the cleint account summary I question the possible tax consequences of this and the severe cost and record keeping burden for the fund companies. If these fees are eliminated most brokers will not take on the liability of servicing an account in which the client may want to move or in which the selling broker may not be in the business any more. The 12b-1 fee allows brokers to offset the cost of continuing to service the clients. If eliminated we may have to charge hourly or move to a fee basis method of compensation. Why this could reduce the costs to larger clients it will most likely eliminate the availability of our services to smaller clients. The 12b-1 fee has also allowed the advent of B C shares which may provide the best way for the client to invest.
Disclosure is good up to a point. However if more and more disclosure is required then the cleint tends to pay less attention to all of it. Clients want to make a decision and go on their way. If they have to read 1 form that has important information most will do that, but make it 4 forms and they tend to skim it not really reading anything.
I want to quickly voice a concern regarding soft dollars. I am an independent rep whose broker-dealer depends on soft dollars to pay many of their expenses. They already operate on paper thin margins and any decrease in soft dollars will almost surely reduce broker compenastion at a time when our insurance and technology costs are skyrocketing. My firm has never encouraged me to sell one product over another, but has posted information regarding certain companies. Soft dollars in my opinion are similar to a factory giving a large retail chain a discount based on volume. A fund gives money to the broker-dealer who in turn may post information about the funds to the brokers. It is cheaper for the fund to reach 1500 brokers at once then trying to see 1500 brokers separtely all over the country.
To wrap up there has been a lot of talk about conflicts of interest. I hear some saying that fund expenses are too high and you should invest with lower cost funds. However those saying this often provide the lowest cost funds, thus a conflict of interest in itself. You can never fully eliminate conflicts of interest or unethical brokers you can just hope that good brokers will not act on the conflicts of interest and that the ethical brokers can continue to stay in the business.