Keeping 12(b)-1 fees discourages churning

In response to Blaine F. Aikin's Fiduciary Corner column “Let's say goodbye to 12(b)-1 fees,” which appeared in the Jan. 18 issue, let's not say goodbye to 12 (b)-1 fees.

In response to Blaine F. Aikin’s Fiduciary Corner column “Let’s say goodbye to 12(b)-1 fees,” which appeared in the Jan. 18 issue, let’s not say goodbye to 12 (b)-1 fees.

He wants to get rid of 12(b)-1 fees because he obviously doesn’t understand how a salesperson can make a living while still giving his client the best advice. The 12(b)-1 fees help to discourage the churning of a client’s account by compensating the salesperson for all the hand-holding, for resolving the administrative glitches and for all the free advice that is given after the sale.

When a client buys a mutual fund, there is only one commission payment, but there is an endless responsibility to provide that client with good advice.

If the salesperson has put that client’s money in a good mutual fund family, the right advice is to move the money from one fund to another within the fund family as the market changes. There is no sales charge to move the money within the fund family, so the client pays nothing and the salesperson doesn’t get paid for giving the client the right advice.

The 12(b)-1 fee is compensation for doing the right thing for the client.

Absent the 12(b)-1 fee, clients would replace their mutual fund investments much more frequently.

Broker-dealers wouldn’t mind, because they would have more commission income.

They just wouldn’t call it churning.

Securities and Exchange Commission Chairman Mary Schapiro wants to eliminate 12(b)-1 fees because she spent her career as chief executive of the Financial Industry Regulatory Authority Inc./NASD -terminating about 40,000 registered representatives so that broker-dealers could pocket 12(b)-1 fees and steal from their clients.

It doesn’t look like churning when your new adviser tells you to sell your old mutual fund and buy a different fund. The “no parking” rule has been a clever ruse.

Salespeople have to make enough money to pay their bills, or else they won’t be there when there is a problem.

Lee Feldman

President

Association of Counselors

for Equity Securities

Pittsburgh

Chamber of Commerce is owed an apology

Joseph F. Keefe’s Viewpoint column in the Jan. 4 issue, “U.S. Chamber of Commerce stance on climate change is all wet,” in which he criticized the Chamber of Commerce for its opposition to climate change legislation, was curious.

He obviously is a believer in global warming, notwithstanding the facts.

Mr. Keefe, in my opinion, is a willing Lilliputian for refusing to accept the facts about global warming.

In late November, more than a thousand e-mails and other documents from the Climate Research Unit at the University of East Anglia in England were released.

One of the prominent figures in these e-mails is Michael Mann, a professor in the Department of Meteorology at Penn State University.

Mr. Mann, a contributor to the United Nation’s Intergovernmental Panel on Climate Change, is known mostly for the now-discredited “hockey stick” graph, which shows purported man-made global warming during the past century.

The e-mails show that he might have committed data manipulation, inappropriately shielding research methods and results from peers, and retaliated against those who publicly challenged his conclusions and political agenda.

Mr. Mann is the poster boy for Mr. Keefe’s position.

According to a study by the American Council for Capital Formation and the National Association of Manufacturers, the proposed American Clean Energy and Security Act of 2009 could cost $3.1 trillion in gross domestic product between 2012 and 2030. By 2030, according to the report, job losses could total 2.4 million, residential-electricity prices could jump 50% and the price of gasoline could escalate 26%.

Mr. Keefe owes the Chamber of Commerce an apology.

Charles K. Arnold

Registered principal and investment adviser associate

Protected Investors of America Inc.

Pleasanton, Calif.

Industry shortchanges VA consumers

As a veteran of the variable annuities industry, I was dismayed to see another consumer-focused idea shot down by the industry establishment.

The insurance industry has been forced to leave the consumer behind and focus on the financial adviser because annuities are sold, not bought. Unfortunately, without the adviser, the consumer may not be informed about products with lower fees and commissions.

The assertion in a letter by Asa O. Wood, vice president of annuity marketing strategy at Jackson National Life Distributors LLC, which appeared in the Jan. 18 issue, that the “consumer” could be shortchanged by simpler VA contracts shows that he is well-aware of how the products are sold.

Mr. Wood’s self-serving letter is designed to protect the adviser from the compliance dilemma that high-commission products sold by Jackson National will give them when more consumer-focused alternatives exist.

The basic premise that the ability to customize the client’s portfolio is most important belies the fact that the guarantee is likely to dominate the performance of any existing living-benefit contract. It also assumes that clients put all their assets in variable annuities.

It would be an interesting statistic for the industry, or at least Mr. Wood, to provide the percentage of VA contracts that currently have account values exceeding the minimum guarantees.

My guess is that it wouldn’t be high for contracts more than a year old.

Even if markets return to a 10% average for equity returns, the expected return is 6% to 7% after the typically exorbitant 3% to 4% fees, not much higher than the guarantees. Products that require large holdings in bonds and money markets will be less likely to beat the guarantees.

Given the wild swings that occur in market performance, it is just a matter of time before a severe correction puts the account value well below the guarantee.

The client then has a product that can only generate the minimum withdrawal without having the guarantee affected.

Consumers are in search of personal defined-benefit plans and would be better off if the industry focused on how to provide an easily hedged product that gives most of the return to the consumer, not the insurance company and the adviser. I am hopeful that now is not the time for the industry’s hubris.

Put the consumer first. Build products for the registered investment adviser market with most of the cost stripped out. Build these lower-commission products that give the clients what they need: guaranteed income with a true chance for upside potential.

Scott Vincini

President

Financial Solutions Group LLC

Trumbull, Conn.