Wednesday, July 21, 2010

After $9.5B (not a typo) - when might a fund's (or all such funds') 12b-1 "marketing and service" fee paid to brokers itself signal a fiduciary duty?

$9.5 Billion was paid in 2009, and in 2007 over $13 Billion of 12b-1 fees were paid by mutual fund investors (through the artifice of deductions from shares' net asset value) - true - according to the article below from Investment News.

Today Investment News reports that the SEC is proposing capping the decades old 12b-1 fee at 25 basis points annually. The SEC is also proposing to allow broker dealers to charge less than 25 bps hoping to stimulate competition. See story link here

A fund with a 12b-1 fee, compared to the same fund but different share class is more, make that the MOST expensive share class - according to nearly all such studies. However, under certain situations and time periods - especially shorter time periods a fund with a 12b-1 fee may be less expensive, than an up-front load share class, except that in many if not all instances a CDSC (Contingent Deferred Sales Charge) may apply for redemptions within a specified time period; with exceptions made for certain types of accounts (IRA's) or depending on the share holder's age or reason for the "early" redemption.

A hallmark of fiduciary duty is continuing and comprehensive advice.
Yet, the descriptive language the SEC attaches to 12b-1 is continued "marketing and servicing" perhaps enabling an exploitable and compensable loop hole for said marketers and servicers in contrast to investors' expectations.

Somewhat confusingly, in near the same almost Siamese breath SEC's Schapiro "The term “12(b)-1” would no longer exist, said Mary Schapiro, chairman of the SEC, during the meeting this morning. Additionally, mutual fund companies would be required to disclose the marketing and service fees, and the ongoing sales charge in every prospectus, shareholder report and investor transaction

Or as a recent comment excerpt stated -
A fee is a fee and the 12-b-1 keeps many brokers in business. Without it, there will have to be another fee by another name. So what? A fee by any other name will be just as sweet (or repugnant). If we need to all rise to a fiduciary standard, then the fee will have to be higher, or as the result of the laws of scale, small accounts will not receive adviser service.

To which I say, no matter the size of the account - if a broker / financial adviser is holding themselves out as - something better than Vanguard or Schwab or another provider - then they should welcome a higher standard / duty owed to that customer.
Anything less is not supported by the facts (i.e. reps and warranties). And to the extent they are also getting paid - by whatever facility or term of art to describe the facility - to market and service the continued holding of certain fund's shares -then the smell test points to "fiduciary duty".

If continued payment for "marketing & Servicing"

Then, in the alternative, due to said continued "marketing & servicing" and receipt of payment therefore - there may arise?

A(nother) duty to perform - a customer suitability determination. Why not? It seems to fit the facts.

If certain brokers / advisers find this objectionable perhaps they would like to SHOW us the evidence that PAST recommendations equalled or outperformed on a risk - adjusted basis a passively invested account benchmark...get ready for an onslaught of? Little to NO such evidence.

And if not for sales load-waived, NAV purchases for family accounts - would the same broker / advisor recommend a 12b-1 fund to their parents? Not many, if at all.
What's good for the family is at least as good for your customer; no matter the size of the account.

When it comes to "marketing and servicing" NON 12b-1 fees funds compared to...
- is there an actual, some might ask palpable difference between the way a (or most) brokers, financial advisors "market and service" NON 12b-1 fee funds shareholders compared to 12b-1 fees funds?

Then permutations arise - how does (or should) a broker address marketing and servicing a customer who owns BOTH 12b-1 and NON 12b-1 fee funds?

How does a broker, financial adviser square that with other reps and warranties?
How is the policy and procedure consistently applied to all of a brokers' or broker dealers' customers accounts?

Ending the siesta on the US taxpayers' dime one easy to read blog at a time.

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