August 25, 2010
I wanted to respond to the revision of the 12b-1 rules. It sounds like most of the revisions are to save the clients money and decrease the commissions that advisors get. I do not have a high opinion of my own industy and pride myself on a high level of service for a low cost. One of the things that I noticed is that most of the advisors that I met sold A shares for the upfront commisssion and then did not service their book of business because it was too big. It was too big because they had to keep selling A shares to new clients and the 25bpt trailer did not provide enough subsequent income to service their current client base. I give my clients a choice between A shares and C shares but C shares allow me to make enough income to not have to grow my practice larger than I can service. I do not have an account minimum and I will work with anyone that wants to work with me. That again leads to a client base that is too large. However, with C shares I can afford to bring in a junior producer to help me service my clients and still split commissions to pay them and help the junior producer into the business. You really have to look at the result of your decision and not just what you think it will do for the client. If you change the trail on C shares to end, then I would have to rethink the size of my practice and limit the amount of service I could offer. This is not a threat or a knee jerk reaction but a practical business decision. You know basic this is how much is coming in, this is how much it costs to be in business and this is how much time I have. When you change one of those factors, it changes business plans and I think it would not be in the best interest of the client.
I feel that a C share trail or 1% advisory fee puts me on the same side of the table as the client. If the account goes up, I get paid more. If the account goes down, I get paid less. If the client is unhappy, he or she can go some where else without worrying about a service charge, surrender charge or if a new advisor will sell them a new A share so they can get paid to work with the client. The 1% is not just for servicing the client with information on their account but also to monitor the investment and actively work for better performance. Thus in the end, I feel the decision to limit the time a 1% trail is paid on C shares would promote advisors taking on more clients than they can service and clients being worse off.
Lastly, you cannot protect a client from everything. You are focusing on how an advisor gets paid. But if you look at a Vanguard no load fund that has 25bpts of expenses and a tactically managed fund that has 2% expenses. You would probably say to use the Vanguard no load fund. However, the tactical fund with it 2% internal charges have outperformed the Vanguard fund by 10% or more over a 10 year period of time. Thus doing 100% better over that time period. The point is investing, performance, risk and serivce are other factors then just expenses and commissions. Expenses are important but not the only thing to focus on.
I could keep going but I won't.
Thomas Thompson