September 16, 2010
The capping of 12b-1 fees specifically within Class C share mutual funds limits the pool of qualified financial services professionals who may offer initial and ongoing advice to lower end and middleclass households if said household lack the resources to pay an out-of-pocket fee for investment related services. In many instances, a financial services professional may offer annual complementary services to a client such as investment tax analysis or portfolio reallocation subject to a clients changing goals. More often than not, a client is not billed for said services due to an ongoing 12b-1 fee of .75% to 1% annually. Such 12b-1 offsets the cost of an advisor's time allocated to servicing his/her client and the cost of operating his/her financial practice, which some clients do not have the ability to pay for out of pocket. While a short and simple form of disclosure needs to be created so that clients fully understand the full content of mutual fund operating expenses in basic terms including the 12b-1 fees, the capping of the fee may be a disservice to those households that rely on ongoing competent advice.
A fee based advisory model address cost transparency and is preferred by investment fiduciaries. Studies show many investors lack the understanding of a fiduciary standard compared to a suitability standard. It can be argued that lower end and middle class households, may not be suitable for the fee based asset management model, which is commonplace among registered investment advisors who seek clients that have sizeable investment portfolios. The total cost outlay to a client for fiduciary advice can be equal to or greater than the cost of using C shares with a 0.75% to 1% 12b-1 payment under a suitability standard. A conclusion drawn after analyzing the totality of an investment advisor`s fee, any cost for investment transactions on equity, alternative, and fixed income securities, and any operating expenses for ETFs and mutual funds.
Wealthy clients often seek and are willing to pay a registered investment advisor because the breath of offerings can are vast and more flexible than the securities offered through a retail mutual fund establishment. Low end and middle class investors may not need every investment instrument to accomplish their financial goals; many refuse to compromise on the level of service offered. A current Class C 12b-1 distribution fee can be a satisfactory way to compensate the advisor who provides ongoing investment related management to investors. Ultimately, the SEC should allow the consumer choice in their preferred method for paying investment advice subject to simple, understandable, and fair disclosure regardless of whether payment comes in the form of an annual 12b-1 fee of 0.75% to 1.0% within a Class C share mutual fund or by annual asset management fees charged by a registered investment advisor.
Mr. Gerald Loftin
Proficient Wealth Counselors, LLC