Will 2010 Be the Year SEC Takes on 12b-1 Fees?

[Community Manager]

Do you think 12b-1 fees should be eliminated? Or do they prevent abuse in the industry?

[B_B]

12b-1 fees need to be more transparent, NOT eliminated.
I don't understand how fee-based advisors can be up in arms about a 1% 12b-1 fee when charging their clients a 1-1.5% management fee on top of a no-load mutual fund's expense ratio. In many cases, a C share with a 1% 12b-1 is less expensive than a no-load with a management fee on top. This is especially true when the use of that C share eliminates all transaction fees for the client.

[edngo]

I have been in business for over 40 years, and have given my clients the choice of the platform they wish to go on. When all the facts are disclosed I have not had any that wanted to go with fees. The small .25 or lower 12b1 fee is the cheapest way for the client to pay for services. If this was eliminated I would either retire, or go to a minimum .75% fee which will be more than they are paying now by three times. My office staff spends 80% of their time servicing clients and this fee helps to differ the cost. We have spent a day changing registration to the heirs when a client dies, transferring shares from grandmother to 10 children and grandchildren for her annual gifts. Drawing up the paper work to transfer shares to a charity, making sure the RMD's were done, producing portfolio report for the clients, and reviewing the accounts with them several times a year long after they have retired and there was no longer any new money coming in. The 12b1 fee helps us to stay in business and to do all these and more for the clients at the most reasonable price possible and thus enhance their portfolio with the minimum drag on the portfolio, and the greatest tax efficiency possible. I am all for full disclosure, but while we are doing so, fee only planners should also have to show the client what the annual fees were on an annual basis and what the annual fees would be over ten years, and what effect the drag would be on the portfolio. If the regulators are truly looking after the interest of the consumer, I would say leave the 12b1 in place as they are as it is truly in the best interest of the clients for the long run, and provides a win win situation for all parties.

[OSU82]

25 Years in the industry - unbelieveable discusion - eliminating 12B-1's.


Full Disclosure - ABSOLUTELY


I manage approx $65mm of total assets with a approx third at AMFUNDS earning .25% trail, 1/3 at TD Ameritrade earning a .75% annual fee, and third misc. I have never advised an investor to sell AMFUNDS - once there, they stay there. Where do you think the investor is paying less - its not even close. Eliminate 12b-1's - I will move all my investor accounts to TD Ameritrade into F-2 AMFUNDS shares, and charge the investor .50%. Still a good deal for investors.



SUITABILITY vs BEST INTERSTS - another unbeleivable discussion.



What is best for the "average joe" investor for the next 10 years, 20 years?



Buy $100,000 in AMFUNDS @ 3.50% on time commision with an internal exp ratio of .75%

or

Invest $100,000 with a FEE ONLY planner, with an internal exp ratio .75% or .50%



It's not even close.



Good luck SEC, FINRA



See if you can top your MADOFF "^%&^ up".

[Bob H]

If you think that the 12-b1's should remain, consider joining the FSI. They're making this a priority for 2010. I've been a member for a couple years and its cheap for the lobbying efforts they provide.

The #2 priority is maintaining independent contractor status for FA's.

Two things I believe in.

Bob

[the observer]

At the risk of being "controversial" :)

1. 12 B1 Fees, correct me if I'm wrong, were never intended by the legislature to be an extra payday for the adviser and shouldn't be funneled there. Stop this practice now.

2. The bigger issue that should be addressed and QUICKLY is the huge "TPM" industry out there. "Money for jam" for managing not money, but rather client relationships for high fees. It's a rip off really much like the Bermuda offshore trust companies and their hand holding, client relationship trust guys who earn money for jam while funneling all the trading to their bank and brokerage side for even more fees.

Bottom line, to serve the best interests of the client these programs should ALL be eliminated, the advisers forced to sign "solicitor" agreements and be compensated by the REAL investment adviser and money manager as a "solicitor", NOT by the client. Advisers should be handing the client a solicitors letter and limited in the scope of their actual involvement since, let's face it, they have NO involvement in the day to day management of the assets and ALL the fees and fiduciary liability would then rest with the company actually managing the money. That way, the "total fees" would be completely transparent to the client because solicitors fees cannot increase the overall cost to the client and they'll also be fully aware as to who is actually doing the work.

In other words, a company currently charging 55 basis points for TPM should increase their declared fees, let's say, to 1% with 45 basis points going to the adviser as a solicitors fee. Shortly thereafter I'm sure, the client will negotiate the 45 basis points down to 10-20bp which is fair for the occasional phone call and hand holding.

This is correct fair, transparent and doesn't trick the client into believing the "adviser" (read solicitor and relationship manager) is a genius or doing a great job with their money.

If people are going to claim they manage money for a fee, THEY should actually manage the money for a change or cut their compensation and just be a relationship manager and solicitor. And before everyone goes off on me, just think, you'll all be off the fiduciary hook, in fact, you don't even need to register as an investment adviser to be a solicitor, you just have to be a good marketer. And isn't the slogan of all the TPM's, "spend more time marketing and gathering assets and less time in the office managing them?"

BTW, any company introducing this model will need to pay me, it's my idea so don't steal it, thank you!

[SpotCFP]

Finally- advisors making sense of this issue! Of course 12b1 fees should remain. Want to call them something different? Fine.


I am not doing any better for my client when I put them in a wrap account charging 100 bp in addition to the underlying fund expenses. I try to use institutional share classes, but the average expenses are still around 80 bp.

(in the "cookie cutter" wrap accounts where the firm picks the funds they are usually in "load waived A shares that include an additional 25 bp 12B1!!)



How is it so terrible to put my client into a well managed, often mutimanaged, C share allocation fund, where the total expenses are 170-200 bp?? The overlay management is done by firms (ie. Morningstar) far more competent than myself (or any advisor for that matter).



If they wish to change strategies, they can either exchange into another fund, or sell after 12 mos with no CDSC.



What would I do when a client comes to me with $5,000 to open up a Roth IRA? Put him in a fee based wrap account??

(none of our available wrap accounts at my bd allow less than $50,000)



This whole thing is a sham. I'm so sick of hearing these holier than thou "fee only" advisors on the radio each week bashing everyone else. I do what is best for my clients at all times. And wrap accounts are not always best.

[Bradly T.]

Ohhhh, but they ARE best....best for the advisor and advisory firm!! Are they in the best interest of the client???????? Sometimes, yes they are. Always? Never!! There are at least as many potential conflicts of interest with a so-called fiduciary account as any commission/service fee based account. None of those conflicts are expressed in any disclosure used by RIAs today since the conflict is less about the account managed and more about other uses of AUM - like gifting, debt acceleration, risk premiums, cash purchases, and income. Then there is the elitist flavor of the whole damn thing - how many Americans have $100k per registration (IRA, Roth, personal, joint, trust = $500k). There's really a national conflict of interest - working class and small accounts and contributory accounts are NOT WELCOME!! Just big money no one needs for a long time....we need that $$ to grow so our "aligned interests" pays more and more money to the advisor and firms year after year!


There truly is a place, a sweet spot, where managed accounts and their fees are very appropriate. But it is exclusionary and there ARE conflicts to manage....and the 50+ ponzi thiefs of the past year were all fiduciaries. Nothing is best for everything. Choice, competition, evolution....that's how the future gets generated and the past improved upon.