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Thursday June 10, 01:47
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Morningstar Describes Life After 12b-1
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Morningstar has sketched out what it thinks the mutual fund distribution system will look like if the Securities and Exchange Commission abolishes Rule 12b-1. According to Morningstar, brokers who are paid directly by investors rather than being compensated by 12b-1 fees will continue to service the accounts of even small investors. "We also believe," Morningstar adds, "that investors will be smarter about what services they demand from [brokers] as the cost of these sources would be more transparent."
In a comment letter to the SEC, Morningstar said it did not believe any particular types of funds would be put at a serious, long-term disadvantage if Rule 12b-1 were rescinded. It conceded that smaller funds may be more costly to operate before meaningful economies of scale can be achieved and as a result would have higher expense ratios. But good ones would overcome this handicap. The letter cited how the Dodge & Cox International Fund, which launched in May 2001 with no 12b-1 fee, was still able to grow to in excess of $1 billion in assets. Morningstar said fund companies would have to pay supermarket costs out-of-pocket or alternatively supermarkets would charge transaction fees to shareholders.
The Securities Industry Association in its May 10 comment letter warned that it was hearing that "some fund complexes have already stopped sending orders to broker/dealers that are significant distributors of their shares" for fear the SEC might try banning directed brokerage. "Eliminating 12b-1 fees would discourage broker/dealers from marketing retirement plans to small and medium-sized businesses, affecting overall pension coverage," SIA warned.
In its May 10 letter, Federated Investors recalled that at the time of the adoption of 12b-1 in 1980 Federated was one of two management firms that opposed the rule. But, said Federated, times have changed. "We cannot understand," the letter went on, "how restructuring the entire industry overnight through the elimination of multi-class funds would serve investor interests. This egg is not merely scrambled, it has been cooked, eaten and absorbed into the very marrow of the industry."
(Fund Action)
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