SEC's 12(b)-1 plan will hike costs for investors, brokers say

Brokers are livid over the SEC's proposed revamp of 12(b)-1 fees, which they say will force them to use higher-priced mutual fund wrap accounts and turn their backs on small investors. "The notion that this will save the consumer money is preposterous," said Craig DuVarney, a CFP and independent broker with Royal Alliance Associates Inc., in Concord, Mass. In announcing the proposed changes, the SEC said it wanted to protect investors from paying "disproportionate amounts of sales charges" with some share classes and increase competition among funds and dealers. But "the minute [the new rule] is finalized … advisers are going to start making moves to maintain their revenue," Mr. DuVarney said. That's because the proposal would cap the total amount of fees an investor could be charged on C shares. Those spread-load shares would have to convert to A shares or a similar class with no 12(b)-1 fees after four to seven years in most cases. Existing C shares would have to be converted five years from the effective date of the new rule. At that point, firms and individual brokers will face a "sudden drop in revenue," predicted Louis Harvey, chief executive of industry researcher Dalbar Inc. "There will be enormous economic pressure" to maintain ongoing revenues, he said, which will force many advisers to shift to fee-based accounts. Some brokers, spooked by earlier SEC discussions about 12(b)-1 fees, are already making the shift. Mr. DuVarney said that since the start of the year he has moved about half of the $62 million he manages for clients into fee-based accounts. "In almost every case, I went to clients and applied for a raise," he said. According to Cerulli Associates Inc., the average fee charged on fund wrap platforms was 1.11% last year, not including underlying fund costs. The average 12(b)-1 fee on C shares is 0.95%, according to Morningstar Inc. That figure does not include other costs like management fees. Brokers also worry that, if C shares disappear, smaller investors will be abandoned or sold A shares and then forgotten. They also point out that scores of small investors may not meet minimums on many fee-based advisory accounts. The SEC's proposal would preserve the 0.25% service fee. But brokers say that's not enough to provide ongoing service to small accounts.