May 6, 2004
The Propose Rule in Release No IC-26356, which would prohibit the use of Rule 12b-1 fees to finance the distribution of mutual funds, would hurt the advisor who works for the smaller client. These fees provide some ongoing revenue and have allowed smaller shareholders to receive some kind of ongoing professional services. Changing this rule will hurt the small investor.
All professionals need to be compensated to provide their professional services.
My large clients, compensate me via an annual asset management fee and an hourly planning fee based on need.
The smaller client, who has some money in mutual funds, and did that investing several years ago, paid me once several years ago. Yet I continue to offer my advice, regarding the funds they own and other questions they ask. I continue to provide reporting and administrative services to them. I carry the full liability of providing those services, and I do that with the tiny 12b compensation.
I have always believed a shares are the best to use, since they have the least internal management expenses at the fund. Recently, I made the decision to give more than 100 small accounts to another advisor, because i cannot provide the service they deserved, and not be compensated.
Many financial professionals, who have a large client base, and do not charge fees, who treat their clients honestly, receive a significant amount of income from the 12b1 fees. If that income goes away, I believe those professionals would be more likely to move clients to new funds that paid a new commission.
With all the scandal in the fund industry, I have observed financial professionals, that have used the bad publicity against one large fund family as an excuse to move all their clients from that fund family to another fund family. They made those moves not at nav, but by taking a new commission. Those same advisors, would not hesitate to churn their clients accounts if 12b1 fees go away.
There is a significant amount of administrative work for every client. If there is no compensation for that work, all the small clients will be hurt.
I wish the individuals that make and change these laws had advice from professions like myself as a part of their own advisory staff. I believe there would be a better decision making process. There has to be a way for professional advisors to be compensation for working with the smaller client.
The large wire houses do not want the smaller client, even with 12b1 fees. The independent advisor services the smaller client. If these 12b1 fees are dropped it will hurt the small investor. They cannot lobby as a big group so the damage will go unoticed.