SAN FRANCISCO — The mutual fund industry’s powerful trade group is stepping up its support of financial advisers.
Seventy-percent of the more than 600 investors who used a financial adviser to buy shares in a mutual fund outside a retirement plan said they were “very satisfied” with the service they received from that adviser, while 26% characterized themselves as “somewhat satisfied,” according to a soon-to-be released study by the trade group, the Investment Company Institute in Washington.
The study, which is expected to be released this week, also shows that advisers do far more than sell mutual funds.
Sixty-three percent of respondents said that their adviser provided them with five or more services, while just 14% said they received only one or two services, according to the study, which is entitled “The Benefits of Professional Advisers.”
The ICI’s support of advisers comes as the Securities and Ex-change Commission is re-examining the use of so-called 12(b)-1 fees, which were introduced in 1980 to help mutual funds pay for distribution and marketing costs.
By making the case that financial advisers receive the vast majority of 12(b)-1 fees — and then demonstrating the benefits to investors of using advisers — the ICI subtly is making a case for why mutual funds should not be forced to stop charging 12 (b)-1 fees, said Stephen Winks, principal with SrConsultant.com of Richmond, Va.
“It’s implicit” that the ICI favors 12(b)-1 fees, he said. “My guess is that this is a very, very big deal.”
Mr. Winks thinks that some advisers might resent being promoted in the name of 12 (b)-1 fees.
“A lot of advisers believe that [12(b)-1 fees are] unfair to the consumer,” he said. “If consumers understood that advisers were making money using 12(b)-1 fees, and their recommendations were geared around 12(b)-1 fees, then how many would think it’s a good idea? Zero.”
In an April 13 speech at a Mutual Fund Directors Forum in Washington, SEC Chairman Christopher Cox said that the fees’ widespread use is a departure from the original intent of the rule. The fee now often is used as a substitute for front-end loads, he said.
“The transformation of the 12(b)-1 fee from a distribution subsidy to a sales load in drag is now so nearly complete that the primary purpose to which the $11 billion in 12(b)-1 fees last year were put was to compensate brokers,” Mr. Cox said.
“Ironically, the strongest case for saying yes [to 12(b)-1 fees] might well be when the 12(b)-1 fee is used to pay not for distribution but for administrative services that are far afield from the kinds of costs that the original rule had in mind,” he added.
Forty-percent of all collected 12(b)-1 fees are used to compensate financial advisers for offering “initial assistance” to investors, while 52% goes to pay advisers for providing ongoing services to investors, according to a study released by the ICI in 2005.
Meanwhile, only 2% of 12(b)-1 fees are used for the originally intended advertising and promotion costs, the study found. Mutual fund underwriters, which act as representatives between mutual funds and third parties selling funds, receive the remaining 6% of 12(b)-1 fees to cover some of their costs, the study said.
But the ICI’s interest in promoting the benefits of financial advisers is not related to the debate over whether mutual funds should stop charging 12(b)-1 fees, said ICI chief economist Brian Reid.
“The bottom line is that [12(b)-1 fees] serve investors well” because they pay for the valuable ongoing services advisers provide to clients, he added.
Indeed, what’s good for mutual funds and financial advisers also
is good for investors, said
Pat McClain, chief executive of Sacramento-Calif.-based Hanson McClain Inc., which manages $1.2 billion.
“[12(b)-1 fees] cause the adviser to serve the client, because there’s an ongoing fee that would stop if the client was not being serviced, though more on the C shares than the A and B” shares,” he said.
Maybe so. But investor satisfaction with advisers doesn’t necessarily make the case for charging
12(b)-1 fees, said Barbara Roper, Pueblo, Colo.-based director of investor protection for the Consumer Federation of America in Washington.
“It doesn’t necessarily follow,” she said. “I think it’s appropriate for advisers to be paid for the service they provide and that the services are of value, but it does not follow that paying for the services by 12(b)-1 fees is best for the investor.”
The ICI is missing the mark when it says that advisers who get paid with 12(b)-1 fees are serving investors well, according to Norman Boone, president of Mosaic Financial Partners Inc., a San Francisco firm managing $350 million.
“I just don’t think [the ICI] knows what planning is,” he said. “They still embrace it as what a wirehouse broker provides — which is little or not at all. 12(b)-1 fees aren’t paying enough to compensate for all the services you need” as an investor.
Advisers who rely solely on 12(b)-1 fees to get paid for
financial planning would be limited in the amount of planning they could afford to offer, said Robert Bingham, principal of San Francisco-based Bingham Osborn & Scarborough LLC, which manages $2 billion.
That said, 12(b)-1 fees can buy good planning if the broker can generate additional commission revenue to go with it, he added.
Although Bingham Osborn & Scarborough used to operate as a commission-based firm, it currently receives no compensation from 12(b)-1 fees, Mr. Bingham said.
Among investors owning mutual fund shares outside defined contribution retirement plans, more than 80% own fund shares through professional financial advisers, including full-service brokers, independent financial planners, insurance agents, bank or savings institution representatives, and accountants, according to the ICI.
