November 5, 2010
I obtained my license to sell life and health insurance 34 years ago. I have obtained the LUTCF designation and am a past president of the National Association of Insurance and Financial Advisors for the Central Iowa Chapter and the State of Iowa. I hold two professional designations: LUTCF and CFCI from the Wharton School of Finance. I passed my Series 6 and 63 exams twenty three years ago.
The 12b-2 rule allowing the payment of up to 25 basis points as a service fee makes total sense to me. As my book of business grew, the nominal sum helped justify my investment of time without the pressure to "sell" something new. Adding a descriptive label to replace the "12b-1 fee" label will help the investor understand why the charge is being made. It will also let them understand that they should expect ongoing assistance from the advisor who helped them acquire the investment.
The proposal to allow mutual funds to issue a new class of shares at net asset value specifically intended to allow a broker-dealer to set a different sales charge and commission level makes absolutely no sense at all. Price cutting is the domain of the weaker competitor, whether that weakness is in knowledge, service, or comprehensive guidance. And, it tends to focus the buyer's attention on price only, to the exclusion of all other factors that will prove to be worthwhile over the lifetime of the client's relationship with the advisor.
When I was young, gas wars occurred. As a consumer, I loved them - until I discovered my favorite dealer was driven out of business because he could not compete on price and I discovered I could no longer stop in for help with this or that problem with the car. The cost to maintain the car went up, the availability of assistance when I needed it went down, and the price of the gas went as soon as enough service stations went out of business. What kind of business model is that???
Competition based on price and cost sounds good but will come at the expense of needed advice and service for middle market investors. We all ready have hundreds of no-load funds that can be placed in wrap accounts. Here price competition exists - without external regulation. If the broker-dealer is given control of the compensation, there is a danger that the registered representative will face indirect coersion to sell one family of funds over another. How does this assist the consumer?
I came into the business with a home-service life insurance carrier. This business model put me in the homes of my customers on a weekly or monthly basis. I was part of the family. My knowledge of insurance and finance made me valuable. If a broker-dealer lower their sales charges and fees in an effort to gain market share, it will no longer be financially feasible for me to continue to provide the level of individualized advice and ongoing service that I strive to provide to my middle and lower market clients.
"Do-it-yourself" may make sense for gardening and some home repairs. But no where have I seen anyone suggest that you should "do-it-yourself" when it comes to health care, legal affairs or investment guidance -- unless the suggestion is coming from someone who will benefit from getting us to "do-it-ourselves". Forty years ago, the mutual fund industry began with a dramatically different and much more expensive business model. Funds were sold under a twenty year contract where the bulk of the first year's investment was paid as compensation to the selling organization. It was an unsustainable business model and should have been disgarded.
But applying the same philosophy to the market place as it exists today makes no sense. It is the middle and lower markets that need all the help they can get. Skewing the compensation for providing this assistance will cost the industry (many registered reps will be driven out of business because the could not develop a sufficient base of clients to support them), the consumer who will continue to develop greater and greater distrust for "Wall Street" rip-off artists (Dalbar studies point to the fact that the consumer, without professional guidance, often reacts to market conditions emotionally and sells when the market has fallen and waits to buy again after the market has recovered 80% of its losses)and the economy as a whole when the bulk of middle and lower Americans decide to pull their support of the foundation for the free enterprise system.
I am reminded of a speaker many years ago who, when commenting on the effort of the sales VP to get everyone to call only on the top 3%, the wealthiest of prospective customers, said to be careful. It is true that the cream rises to the top. And the best advisors will always show up there. But remember, the cream, this top 3%, can only rise when there is healthy whole milk in the rest of the bottle. If the milk (in this case our industry) is sour, there will be no cream for anyone. The people the SEC is trying to protect the most--middle and lower market investors—will be hurt the most, since they will be deprived of the guidance and service