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With all the uncertainties that come whenever you make an investment, there's one thing you can be sure of: Every dollar that goes toward paying fees and other investing costs is one less dollar in your pocket. It always makes sense to eliminate unnecessary fees because it leaves you with more money in your pocket.
That's the reason why The Motley Fool has paid so much attention to the latest efforts from the Securities and Exchange Commission to rein in so-called 12b-1 fees. These fees, which nominally go toward sales and marketing costs, represent just one more way in which some fund companies and financial advisors engage in compensation practices that can stand in the way of their customers getting the treatment they deserve.
Let the scare tactics begin
As you'd expect, though, comments from the mutual fund industry have largely come in against the proposed SEC reform. Consider the following arguments made by various fund companies and trade associations:
- The Investment Company Institute, which is the mutual fund industry's trade association, argues that the SEC proposal would actually lead to higher costs for fund shareholders and that any benefits would be minimal.
- BlackRock (NYSE: BLK ) is one of the largest managers that offer C shares -- a class of mutual fund shares that typically imposes a 12b-1 fee as high as 1% annually. It argues that one of the only ways small investors can gain access to professional investing guidance is through the incentives that C shares pay to financial advisors.
- AllianceBernstein (NYSE: AB ) points out that the rules could adversely affect Class R fund shares, which are designed for employer retirement plans. Without 12b-1 fees, fund companies may find it no longer cost-effective to offer those shares to small employers, effectively locking them out of 401(k)s and other worker retirement plans.
From these comments, you'd think that the mutual fund industry would come to a screeching halt without unfettered 12b-1 fees. In reality, though, the rule change would simply force fund companies and financial advisors to be more obvious about the way they charge for their services.
Goodbye and good riddance
Let's start with C shares. Many companies, including Franklin Templeton (NYSE: BEN ) , Goldman Sachs (NYSE: GS ) , and Janus Capital (NYSE: JNS ) , offer C shares that impose substantial 12b-1 fees on clients. Some of the money collected from those fees goes to the financial advisors who sell fund shares to their clients.
But why should it be the job of a fund company to collect compensation for a financial advisor? Many advisors state their fees in an upfront manner, rather than relying on back-room compensation arrangements in exchange for steering clients toward certain investments. In many cases, you'd be better off paying a fee-only financial advisor for advice combined with the best investments that fit that advice, rather than having a commission-based advisor take money from underperforming funds that happen to have 12b-1 fees.
The argument is even stronger for R shares and 401(k) plans. Retirement plans are supposed to be an employee benefit, not a chance for fund companies to take advantage of workers whose employers refuse to pony up for 401(k) investment options that don't impose 12b-1 fees. And again, companies like AllianceBernstein, JPMorgan (NYSE: JPM ) , and Invesco (NYSE: IVZ ) that charge 12b-1 fees on some retirement plan funds have a captive audience whose only choice other than to pay those fees is not to participate in the most valuable tax-deferral opportunity most people ever have.
Get everything on the table
The real issue behind the SEC proposal is that Wall Street firms are convinced that the investing public would never pay them anything close to the compensation they receive if the public had to actually write a check for the fees they pay. The SEC's proposed rules don't go anywhere near that far, but they are a step in the right direction -- and perhaps a step that will make more investors take notice of just how much money goes toward services they may never use.
What do you think about 12b-1 fees? Chime in by saying your piece in the comments section below.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.