Producers: 12b-1 Draft Promotes Short-Term Thinking

William Barker of Motley Fool Asset Management L.L.C., Alexandria, Va., says he applauds SEC efforts to make 12b-1 fees more transparent and cap fee payments.

“Although we believe the proposed rules do not go far enough in limiting these fees, and fear that entrenched industry interests may fight to water down these regulations, we are also hopeful that this will be a successful first step toward eliminating 12b-1 fees and ongoing sales charges, which impose costs on fund shareholders that are not offset by corresponding benefits,” Barker says.

Many financial professionals who have commented say income associated with 12b-1 fees helps compensate them for the time they spend providing ongoing services for individual investors and retirement plan sponsors with relatively small accounts.

“Please be aware that there is a lot of ongoing, continuous work associated with these clients, including education programs for their employees and annual meetings, which require travel for a physical presence at each time,” says Robert Miller, a New York investment advisor. “Monitoring the program and fund selections is also ongoing work.”

Stephen Campbell, a Fisherville, Va., advisor, says the SEC seems to think eliminating or altering the 12b-1 fees would help investors by lowering their cost of investment.

“I could not disagree more with this assertion,” Campbell says, noting that he meets with his 300 clients a total of about 900 times a year to handle matters such as reviewing investments.

“Many of these appointments are with older clients, and many are with clients who have assets of under $50,000,” Campbell says. “These appointments average an hour in duration and over my 26 years being securities-licensed, I have never billed my clients for this valuable service I provide.”

If the 12b-1 income falls or goes away, service will suffer, Campbell says.

Howard Townsend, a Bonsall, Calif., planner who holds the Chartered Life Underwriter (CLU) designation, says elimination of the current “C share” structure would force advisors to convert all C share clients into fee-based clients and probably would force advisors to abandon many clients with small C share accounts.

The time, paperwork and fiduciary responsibility involved with handling small C share clients without 12b-1 income would be overwhelming, Townsend says.

“In order to retain business value for your succession planning, only fee-based accounts would have any buyer interest,” Townsend says. “All other accounts would end up being orphaned. The smaller investor falls through the cracks again.”

Edward Mallon, a Portsmouth, N.H., planner who holds the CLU designation, says the proposed change in the fee structure would lead a representative to focus far more on making new sales rather than helping clients track investments they already own.

“With better servicing clients are more likely to stay invested while receiving good advice from the representative,” Mallon says. “As consumers’ needs change they can easily be hurt as they move from representative to representative looking for ongoing advice and buying new A shares. This is not the case with C shares. In selling C shares the representative’s compensation is small and they must be committed to maintaining a client for many years before compensation reaches that of the initial compensation of an A share.”