12(b)-1 reform won't expose hidden fees, brokers say

Is the Securities and Exchange Commission unfairly picking on 12(b)-1 fees? Some observers think so. The SEC's proposal to reform 12(b)-1 fees would force the conversion of level-load, or C, shares into share classes with no more than a 25-basis-point trail and broadly increase disclosures of fees. The SEC wants comments on the proposal by Nov. 5. Brokers generally have no problem with improving disclosure, but they and other critics contend that the agency is neglecting to shine a light on other mutual fund expenses and practices that cost investors money. "It's odd they're going after Class C shares [but] not doing anything on other issues [such as] reforming the way fees are charged in 401(k) plans," said John Robinson, owner of Financial Planning Hawaii Inc., which advises on approximately $100 million in assets. Mr. Robinson said the "most obvious" issue with 401(k)s is the use of load-waived A shares, whose 25-basis-point trail goes to the product provider. Institutional classes of shares would be cheaper, he said. The trail fees are disclosed in legal documents. "But most [investors] don't read those,” Mr. Robinson said. “And even if they did, they'd have a hard time finding" the disclosures and understanding them, he continued. Mutual funds pay a number of other fees to intermediaries which are not disclosed. These payments typically are referenced in prospectuses of statements of additional information, but specific amounts are not revealed. So-called revenue-sharing payments, or shelf space fees, are used to "compete for access to the broker," said Barbara Roper, director of investor protection for the Consumer Federation of America. Even though revenue-sharing fees are paid by the fund's adviser, and not out of fund assets, they "tend to drive costs up rather than down," Ms. Roper said. Funds also pay record-keeping costs, usually on a per-account basis, as well as fees to access the no-transaction-fee platforms of discount brokers. Amounts paid for trading commissions are disclosed but are not included in mutual funds' expense ratios. Within trading costs are so-called "soft dollars," which are excess commissions that money managers can use to buy research. But soft-dollar payments made to executing dealers and third-party research providers are not broken out and disclosed. (For more on the soft-dollar issue, see the story.) Funds' 12(b)-1 fees "are an easier target and somewhat better-understood than soft-dollar brokerage," said William George, an Encino, Calif.-based consultant and longtime critic of undisclosed soft dollars.