by Daisey Maxey and featured in Dow Jones Newswire
(New York) – A proposal by regulators to limit and shed more light on mutual-fund distribution charges won’t, for the most part, affect brokers’ overall compensation but could encourage more fee-based advisory business.
Even if brokers were to see the proposal as a threat, they aren’t likely to raise many complaints.“Right now, broker-dealers are running scared and don’t want to fight back,” said Jonathan Henschen, a recruiter at Henschen & Associates LLC. “It’s kind of a witch hunt environment.”
The changes, proposed by the Securities and Exchange Commission this week, would restrict funds’ ongoing sales charges to the highest fee charged by the fund for shares that have no ongoing sales charge. For example, if one share class of a fund charges a 4% front-end sales charge, another class couldn’t charge more than 4% in total to investors over time.
Funds could continue to pay 0.25% per year out of their assets as “marketing and service” fees, however.
The proposed rules would also require that funds list sales charges in their disclosures, rather than lumping them under the term “12b-1 fee” as they had.Broker-dealers who do a lot of business selling mutual funds’ C shares may be inclined to switch that business to self-directed advisory accounts under the proposed regulations, Henschen said. That’s because C shares typically charge no front-end load but have a higher distribution fee, or trail, to compensate the broker than do class A shares. If a broker is no longer entitled to all of that trail, which is typically 1%, they could make it up by switching to the self-directed advisory account and charging 1% on the fund assets.
That will make the fee more visible and is more likely to require that the broker justify the charge, Henschen said. “It will be more transparent, because they will get billed quarterly,” and it will be difficult to justify having a static account in a fee context, he said.
Bing Waldert, a director at consultancy Cerulli Associates, said the net result will likely be that advisers find other ways to be compensated, while customers gain more transparency on fees.
“You’ll see the shell game happen a bit, see things get moved around,” said Waldert. “The client costs will be the same, but there will be more transparency for the client, which will be good…You won’t necessarily see advisers take an income hit as a result.”
The primary impact would likely be on the small segment of advisers who sell retirement plans, which tend to have low balances and higher distribution fees, Waldert said.
James Sotell, managing director at Comperio Retirement Consulting Inc., a registered investment adviser with $500 million of retirement assets under advisement, sees a big impact on the retirement side of the business. He thinks the change is great for investors.
As an RIA not affiliated with any broker-dealer, Sotell doesn’t accept 12b-1 fees. Many smaller 401(k) plans use brokers, which are paid by a 12b-1 fee, he said. “Instead of a small employer having to pay $20,000 to administer a plan for 200 people, the plan offers fund share classes with a 50-basis-point 12b-1 fee, which generates $25,000,” he said. That charge often isn’t even noticed by the participant, he said.
The proposed changes would level the playing field for RIAs, who don’t charge 12b-1 fees, because it will make comparing their fees against those who do charge 12b-1 fees easier, Sotell said.
Brett Campbell, a principal at Edward Jones client solutions group, said the broker considers the added transparency a good thing and is pleased that the 0.25% service fee would continue under the proposal. Separating the ongoing service charge from the actual sales charge or load will make it “much clearer to clients what they’re paying,” he said.
Under the proposal, the maximum sales charge could be applied in a number of different ways, so some new fund share classes may be created, Campbell said. “You may see some different share classes created that spread the sales charge out over two or three years.”
(Daisy Maxey is a Getting Personal columnist who writes about personal finance. She covers topics including hedge funds, annuities, closed-end funds and new trends in mutual funds, and can be reached at 212-416-2237 or at firstname.lastname@example.org)
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