What 12b-1 Reform Means for Investors

Reader Comments

Back to blog

This is the right start, but there are some flaws to the proposals.

Benefits to investors: Long-time fundholders who don't change funds and don't buy A shares won't end up paying commission penalties for staying with the fund past the timeframe when their aggregate fees would exceed the A shares sales charge.

Risks:

1. Brokers will, more than ever, try to steer clients to A shares to take the maximum commission off the top.

2. When clients are heading near the time when brokers will no longer get the extra 75 bp per year, brokers will try to get them to switch to new funds to start the commission process over again. This is not technically churning and is not necessarily illegal because brokers are not fiduciaries and therefore can recommend such a move if the fund is 'suitable.'

3. MF companies may actually raise A share loads up to the maximum, to incentivize brokers to sell either the A shares or the no load shares, since there would be a longer timeframe for the broker to get paid his annual 75 bp kickback.

There is also something in these new rules that would allow funds to be sold without loads or embedded broker kickbacks and allow a broker to set his or her own asset-based annual fee commission based on a fund. The idea is investors would choose brokers charging the lowest fees. In reality, without SEC-defined limits brokers are likely to abuse this privilege and charge as much as they can to investors, most of whom understand absolutely nothing about fees.

More reasons why investors should never use brokers. If you're an intelligent investor, you're smart enough to trade on your own. If you're a novice investor, you need advice delivered by someone who can provide fiduciary-level oversight. That leaves RIAs, who, within 10-15, are going to own the individual investor market as investors leave the churners in the dust.

Fiduciary Man of MA 2:57PM October 29, 2010

"GoneFisin" you may have a claim and I would suggest having an attorney review it however, telling everyonw who has paid a 12b-1 that they have been "ripped off" is as irresponsible as the advisor was who managed your money. I would be interested in knowing which fund company you were invested with, the time frame of your investment and what your expectations were going intot he investment. There are NO investments that always make money. Even CD's lose buying power year of year in rising inflation periods. If the advisor does his job correctly and explains the purpose of the fees (which they always should) then there are NO surprises. It should be a professional RELATIONSHIP. Not a TRANSACTION. When you develop a relationship with a physician, you dont pay upfront for your doctor's visit and then refuse to pay for the treatments. It is the same here. You should be paying your advisor for his time and his efforts. If you have an advisor who is not providing you with advice then it is time to move onto someone who will.

As for 12b-1 fees...they are an imprtant part of the intermediaries business. If you have an advisor with 100 million dollars under management, you will get a very different service level if he has capped his business at certain number of clients. Think about it, it is much easier to get service from someone who focuses solely on servicing his clients versus finding new clients. What is going to happen if this continues is that in order to do ANY financial business outside of bank deposit the advisor is going to charge a flat fee. It has already started to happen with brokers charging as much as 1.5% for service. Not only will this continue to increase but you will be required to sign a conract stating that you will not move your money for a length of time without penalty. Trust me, the 12b-1 fee is the least expensive way to do business with an Advisor. If you want less fees, I suggest you open an online account with a discount brokerage and manage the money yourself.

Also, if you used mutual funds and did not hold them for at least 5-10 years before getting frustrated with your advisor, then please don't blame the advisor for the performance. Its like blaming a pilot for hitting turbulence during a flight.

more BIG government of VA 4:04PM September 29, 2010

Move to ETFs. No 12b-1 fees and expense fees 90% less than mutual funds. check it out.

Jeff of TX 2:50PM August 11, 2010

I was ripped for thousands of dollars with this hidden .25% commission along with the fact that my Advisor loaded me up with a 12b1 fund that was a looser causing me to also loose MANY additional thousands of dollars because of the funds high load, plus commission, plus horrible performance.

By my advisor selecting this fund and the dismal performance of this fund over a fund with no load and that performed well. Nobody's talking about that aspect and only the .25% commission.

In fact the .25% commission is a $ drop in the bucket compared to what I lost because of the funds horrible performance.

Upon questioning my advisor and his boss, the director, via e-mails both Lawyer-ed Up immediately. That's how they fight you, by having their lawyers send you a letter of legal intimidation so practically everyone backs-off and just moves their retirement.

People need to stand up and fight them by filing formal complaints with the SEC (Securities & Exchange Comm.) against the firms and the advisor, and ALSO with their state financial regulator against the licensed advisor and the state's banking regulator against the financial institution the advisor works for.

Another trick they use is to license the advisor with the brokerage firm they are using rather than the advisors true employer. That's because the brokerage firms usually have lawyers on the payroll to run interference for them

and you'll not be able to afford fighting them.

The 12b1 was created in 1940 and it had a purpose back then but it has turned into a SCAM with the support of the SEC by not repealing it 100%.

Makes me wonder who's getting their palm scratched !!!

GoneFishin of PA 8:14AM August 07, 2010

Add Your Thoughts
Your comment will be posted immediately, unless it is spam or contains profanity. For more information, please see our Comments FAQ.

Back to blog

Fund Observer

We cover the latest mutual fund news, commentary, and investing strategies for the everyday investor.

advertisement

advertisement