But these three fund firms would likely take the biggest hit under current proposal
Concerns about the impact of the proposed 12(b)-1 reform are overblown — at least for the fund industry, according to a report released this week.
Although it is true that fund companies may have to spend millions of dollars to comply with the rule, “the impact to most asset managers should be modest,” Robert Lee, managing director at Keefe Bruyette & Woods Inc., and Larry Hedden, assistant vice president at the firm, wrote in the report.
That's not to say firms won't feel the pinch. Waddell & Reed Financial Inc., Calamos Asset Management Inc. and Franklin Resources Inc. are expected to be hit the hardest by the reform, according to the report.
Last summer, the Securities and Exchange Commission announced a proposal that would allow fund companies to charge a “marketing and service fee” of up to 0.25%. Anything above that amount would be deemed a continuing sales charge, which would be limited to the highest fee charged by the fund for shares without such a charge.
The 25-basis-point cap has caused concern among mutual fund industry executives. The proposal received more than 2,400 comment letters, mostly in opposition to it.
But there are several factors at play that would limit how much the proposal would hurt the profitability of most asset management firms, according to KBW.
With more assets going into fee-based accounts, it would seem that there is already movement away from selling funds with 12(b)-1 fees, according to the report.
“The SEC may be tackling a perceived issue that is already in decline,” Mr. Lee and Mr. Hedden wrote.
Also, given that most investors hold a mutual fund only for about four years, along with the long implementation and grandfather period for the proposal, KBW estimated that firms' “pre-existing books of assets under management would face limited impact.”
However, those firms that do charge 12(b)-1 fees in excess of 0.25% clearly have the most to lose if the proposal is passed as is, according to the report.
Waddell & Reed leads the pack with 16.5% of assets in share classes with 12(b)-1 fees over 0.25%. Calamos comes in second with 15.1%, and Franklin is third with 11.8%.
KBW acknowledges that without knowing what the final proposal will look like, it is hard to predict the outcome.
“It is not our contention that asset managers will be unimpacted by prospective change, particularly since we don't know the final rules,” Mr. Lee and Mr. Hedden wrote. “However, a look at most asset managers' existing books of business, coupled with SEC prior proposals, suggests that the impact to most asset managers should be modest.”
Calamos executives believe that 12(b)-1 reform will only have a moderate impact on its bottom line, said Jim Boyne, president of distribution and operations, in an e-mailed statement.
“We believe, based on our experience and trends in the industry that the impact to Calamos may be made even more modest as an increasing proportion of our mutual fund sales are taking place in mutual fund share classes that either do not have 12b-1 fees, or have 12b-1 fees within the currently proposed 12b-2 limits,” Mr. Boyne said. “Additionally, we ceased offering Class B shares of our mutual funds in July 2009, which we believe will further reduce any potential impact of the proposed rules.”
Roger Hoadley, a spokesman for Waddell & Reed, declined to comment. Stacey Johnston, a spokeswoman at Franklin, also declined to comment. Only fund companies that charge more than 0.25% in the A-shares of their funds will see their profitability get hit from 12(b)-1 reform, said Keith Hartstein, president of John Hancock Funds LLC.
“For B- and C-shares it won't impact asset management profitability because 100% of the 12(b)-1 gets passed on to the adviser,” Mr. Hartstein said.
The SEC has said it will revisit the proposal this summer.
