12(b)-1 fees are needed and don’t bother clients

As a broker, registered investment adviser and certified financial planner who has operated under both commission- and fee-based compensation models for almost 20 years, I feel that I am qualified to provide a perspective on the 12(b)-1 issue

As a broker, registered investment adviser and certified financial planner who has operated under both commission- and fee-based compensation models for almost 20 years, I feel that I am qualified to provide a perspective on the 12(b)-1 issue.

Our experience has been that the majority of middle-class investors — those with less than $1 million portfolios — prefer not to have advisory fees billed separately or broken out from their account values and debited from their accounts. They find it inconvenient and distracting, especially during periods of negative performance.

Over the years, we have found that for most investors with less than $1 million to invest and who require an initial comprehensive investment or personal financial plan, an A-share structure with break-point discounts and a 25-basis-point trail is less costly both initially and over the long run.

We have always disclosed our compensation upfront, including an explanation that the 12(b)-1 will cover our continuing service, which includes reporting and periodic reviews. We have yet to have anyone complain or question the value versus cost of this arrangement.

In fact, most of the new clients we receive are leaving pure fee-based and wrap arrangements at wirehouse firms and banks because they were too expensive, provided too little service and didn’t make money over the long run. A review of what they had been paying for some of these “programs” was, quite frankly, obscene.

As for the amount or limit, I am quite comfortable with a 25- to 35-basis-point maximum fee level for equity mutual funds and a 5- to 10-basis-point level for bond funds. In my opinion, these levels are fair and reasonable for both the adviser and investor, given long-term historical performance.

As a business operation, we count on 12(b)-1 revenue to support our practice during slow periods and to allow us to continue serving accounts — i.e., retirees’ — that are no longer investing additional funds. Eliminating 12(b)-1 fees would force us to change our business model, incur more overhead, limit investment options and services, and probably force us to eliminate or restrict services to smaller accounts of less than $500,000.

My advice is to retain the A-share format with an annual limit on continuing adviser compensation — maybe 35 basis points — with no lifetime limit, eliminate B-share and C-share formats, and rename 12(b)-1 fees to reflect what they are truly being used for: continuing adviser compensation.

Christopher Parios

Principal

Parios Associates Inc.

Warrenton, Va.

Spending may not fall in later retirement years

In the article “Insurers are upping VA withdrawal benefits” (Nov. 15), I find the comment made in the last paragraph by Rob Scheinerman, senior vice president at SunAmerica Retirement Markets Inc., interesting, but not one to take to the bank.

There may be an assumption that retirees spend less in the third decade of retirement. Most retirees have diminished buying power in their later years, based on the value of the dollar, the increasing health care issues that they face and the necessary expenditures to maintain or stay in their homes when they have to hire outside help.

As retirees age, health care costs, home care costs and the possibility of home health care services are significantly higher than their earlier retiree expenses. The point is, what do retirees stop buying during the third decade of retirement that they bought in their earlier years?

It isn’t safe to assume that “overall spending is substantially lower later in retirement.”

Al Marano

Regional director

One Resource Group Corp.

Fort Wayne, Ind.