You Do the Math

Imagine $13 billion evaporating. Poof. Gone from the financial services system. If 12b-1 fees are prohibited, financial advisors collectively would lose about that much per year in income. That's not an exact number, of course, but it's what the SEC estimates. Even as a ballpark, it's a pretty scary number. On the bright side, that amount would default to retail investors, since 12b-1 fees are taken

Imagine $13 billion evaporating. Poof. Gone from the financial services system. If 12b-1 fees are prohibited, financial advisors collectively would lose about that much per year in income. That's not an exact number, of course, but it's what the SEC estimates. Even as a ballpark, it's a pretty scary number.

On the bright side, that amount would default to retail investors, since 12b-1 fees are taken out of mutual funds' assets. This 12b-1 prohibition could happen. The SEC is intensely interested in the matter (see our lead news story on page 16 for William Donaldson's remarks on the subject), and brokers aren't the only ones in danger of losing some filthy lucre.

Brokerage management no doubt noticed that the SEC recommended eliminating directed brokerage (also called directed trades) because the practice is a conflict-of-interest minefield. It's hard to say how much money changes hands industrywide, but one big fund family I know says it paid around $35 million in directed trades to the several b/ds with which it maintained “strategic relationships.”

You do the math.

Then consider revenue sharing, which is what the mutual funds pay for “shelf space” on a brokerage's preferred fund list. According to Financial Research Corp., the 50 largest fund families pay about $1.5 billion to brokerages. The SEC isn't too pleased about that either, on the grounds that it is in effect a hidden cost to the retail client.

Taken together, the issues of directed trades and 12b-1 fees are going to have a major impact on financial advisors and their firms — and on fund companies too. As one fund executive I know put it, “This has got to come out of somebody's pocket. Will it come out of the b/ds' or the brokers' pockets, or maybe the asset managers'? This raises some interesting questions.”

The Registered Rep./Pioneer Investments Outstanding Broker Award

Now there is more reason than ever to nominate a standout financial advisor for Registered Rep.'s Outstanding Broker Awards. The OBA, now in its 24th year, recognizes 10 truly outstanding brokers. Chosen by our editors, the winners exemplify the highest levels of professionalism. Entrants are judges on their productivity, their civic mindedness and their ability to help others professionally. (OBA entry forms can be found on p. 71, or online at http://images.industryclick.com/files/156/OBAad.jpg.)

The stakes in this year's OBA contest are higher than ever. Pioneer Investments, the fourth-oldest mutual fund company in the U.S. and the awards' official sponsor, is joining with Rep. to throw a black-tie awards gala. Winners will be flown to New York for the event. It is fitting that Pioneer would join us in bestowing this award, since the firm has long been an advocate for the financial advisor. Its motto says it all: “Serving investors and their advisors since 1928.”

We thank you for your support. Drop us a line with your comments at: 249 W. 17th St., New York, N.Y. 10011-5300. Or email us at [email protected]. Publisher Rich Santos can be reached at [email protected].

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