Raymond James COO has 'mixed feelings' about 12(b)-1 proposal

The Securities and Exchange Commission's proposal to revamp 12(b)-1 fees may not be as draconian as feared, but it could eliminate a cost-efficient choice for investors, said Chet Helck, chief operating officer of Raymond James Financial Inc. “I have mixed feelings about it,” Mr. Helck said of the proposal. "The basic problem with the whole concept [of reform is] that it is derived from a transactional point of view,” he said. "If you assume the only service provided in selling a mutual fund is the transaction, then an ongoing revenue stream … may not make sense. But if you assume there is an ongoing advisory process or service, a revenue stream commensurate with the service provided is appropriate." Mr. Helck said Raymond James will submit comments on the SEC's proposal, which would create a new rule that covers mutual funds' asset-based sales charges. Among other things, the proposal would cap the amount of ongoing trails that could be charged, forcing the conversion of C shares to another share class after a number of years. “I'm not sure you have to limit 12(b)-1s,” said Mr. Helck, who is worried about the elimination of share classes that might work better for some investors than alternative fee arrangements. Another way to address concerns with the fees is to “oversee what you're doing for them” better, he said. "Probably disclosure has to be more than it is now," Mr. Helck added. But because the average fund investor doesn't hold on longer than the estimated four- to six-year phaseout period for C shares, "in the aggregate you would be affecting a minority of shareholders," he said. In addition, the SEC proposal would require that mutual fund trade confirmations disclose the amount of any sales charge in both dollars and percentage terms, plus break points and the maximum deferred sales charge that a customer might pay. Raymond James is one of the few firms to disclose fund costs on confirmations. A 1979 SEC no-action letter exempted brokerage firms from disclosing sales charges on confirmations. Officials at Raymond James said the confirmation disclosure has not had any negative effect. “People want to know what they're paying,” Mr. Helck said. Some observers think confirmation disclosure would be the key competitive driver of the proposal. "For sure, that will raise competitive concerns" in the industry, said Louis Harvey, president of Dalbar Inc. With spread loads, there's often “no accountability,” he said. Brokers may be getting fees without ever calling the client, he said, “and there's no comeuppance for it, whereas if [clients] see the fee, they expect some level of service.” “In other cases, brokers are grossly underpaid for what they do,” Mr. Harvey added. "Dollar disclosure of sales charges on the confirm gives you a better sense of what you're paying," said Mercer Bullard, founder and president of Fund Democracy Inc., a shareholder advocacy group. "But there's still the problem of the confirm arriving after the sale," he said.