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How the new 12b(1) fee restrictions could transform the financial advisory industry

Brokers selling 401(k) plans may have another nail driven into their coffin

Author Elizabeth MacBride July 22, 2010 at 3:56 AM
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Jim Sotell: Fees that were hidden are coming to the surface. That will put RIAs on a more level playing field with brokers in the retirement plan business.

Jeff Spears

Jeff Spears

July 22, 2010 — 1:22 PM

While this rule change will definitely hurt traditional B/Ds it will have a greater impact on dual registered “independent” wealth advisors. The people who are complaining the most are the people that have been bilking their clients with these hidden fees. This is a much needed and good rule change in my opinion.

Brooke Southall

Brooke Southall

July 22, 2010 — 2:01 PM

Hi Jeff,

This seems like an important point.

Maybe you can explain in more detail why hybrid independents are the ones who are most likely to use C shares intensively — and why brokers at traditional BDs are not?

thank you,


Jeff Spears

Jeff Spears

July 22, 2010 — 2:14 PM

B/D’s definitely sell C shares and this will impact their business. My opinion is that it will have a much larger impact on the smaller wealth managers that are dual registered than it will on the LARGE B/Ds.

The objections I read about the 12 (b) 1 fees and how they allow firms to provide advice to smaller investors just strike me as a weak rationalization. Fees are a zero sum game.

Ron Rhoades

Ron Rhoades

July 22, 2010 — 6:32 PM

Jeff’s good comment, about the “weak rationalization” that “12 (b) 1 fees … allow [BD] firms to provide advice to smaller investors” – is interesting. Permit me to add some additional thoughts to this discussion:

First, I would posit my view that if ongoing financial planning or invesmtent advice is provided in return for an ongoing 12b-1 fee, as 12b-1 fees currently permit, then the 12b-1 fee is really an “investment advisory fee in drag” – and “special compensation” (which makes the broker-dealer exclusion from the definition of investment adviser inapplicable).

Second, I have heard and read repeatedly that “small investors” cannot be served by RIAs. Yet, $20,000 to invest, in a Class A mutual fund, usually results in a 5% or greater sales charge. For the $1,000 the investor would pay in a sales load, there are many RIAs who would prepare an investment policy and recommend specific low-cost investments for such a fee. And, if ongoing advice is requested, such as might occur with a 1% ongoing fee, there are many RIAs which charge hourly fees, who would be willing to provide a few hours of guidance for $200 a year. Not all RIAs are “wealth managers” – there are many good independent RIAs out there who serve small investors – and there will be many more in the years ahead.

Third, most prospective clients to our firm, who were served by B-D firms before, possess mutual funds with 12b-1 fees – yet were not aware of the fee, nor of the fact that their B-D (and the registered representative) were likely compensated by same. The real issue is that all fees and costs must be AFFIRMATIVELY and REPEATEDLY disclosed. And investors seeking guidance will need to get used to paying disclosed fees.

Fourth, in our due diligence analysis of mutual funds, we reject any fund that charges a 12b-1 fee, of any amount. We have never seen the shareholders of a fund benefit from any 12b-1 fee. In theory (but not in practice), mutual fund boards should ensure that 12b-1 fees paid for administrative expenses result in an expense reduction of the same amount (or greater) paid directly out of the fund – but this does not occur. For similar reasons, we reject the use of any mutual fund which makes payments in the form of soft dollars. As we move from a “sell side” securities industry to “buy side” financial intermediaries, more pressure will be put on mutual funds (by advisors) to abandon all 12b-1 fees, and all payment of soft dollar compensation. It will take time for the “market” to work in this fashion.

Chris Jalonen

Chris Jalonen

July 22, 2010 — 7:39 PM

Does anyone know if the pending and proposed changes to C share 12b-1 fees will affect existing shares that were already sold, (and the 12b-1 fees currently being paid to brokers, or if this proposal will affect new investments going forward?

Elmer Rich III

Elmer Rich III

July 1, 2011 — 3:27 PM

It is worthwhile looking at the experience in India with mutual funds when investors were asked to write two checks on a mutual fund purchase: – One for the fee for the fund – One for the investment

Mutual fund purchases didn’t just go down — they went to zero. Brain science and other advanced psychological sciences are teaching us that our brains will not pay today for long term benefits. Our brains, along with all animals, are hyperbolic discounters of future benefits.

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