The mutual fund industry, which collected approximately $9.5 billion through 12b-1 fees last year, according to data from the Investment Company Institute, has not taken a new proposal to disallow the fees lying down.
In the 90-day comment period since the SEC’s proposal, the usually formal and boring (with exceptions!) comments on the SEC’s websites have practically descended into a flame war between mutual fund managers and investors.
Literally hundreds of people have commented.
First a little background. Then, details about the flame war.
On July 21, 2010, the SEC unanimously voted to propose caps for mutual fund 12b-1 fees, which are annual charges that investors pay to invest in certain mutual funds. The problem with 12b-1 fees, according to the SEC, is that investors don’t always realise they are paying them — sometimes years after they invest in the fund.
Up until now, investors in certain mutual funds have had two fee choices.
First, they can pay an upfront fee, usually 2 to 5 per cent of the amount they invest, plus a very small 12b-1 fee (up to 0.25% annually of the amount they invest) for every year that they own shares in the mutual fund. Or, they can pay no upfront fee, but pay a larger 12b-1 fee (up to 1% annually of the amount they invest) for every year that they own shares in the mutual fund.
But many investors remain ignorant of what 12b-1 fees are — and even if they are aware, they can’t always shop around for the best deals on mutual funds because brokerages cannot compete with each other on fees.
Under the SEC’s new rules, investors would still have the choice between upfront fees or annual fees for investing in mutual funds, but the annual fees would be capped at 0.25%. Moreover, these annual fees (unlike current 12b-1 fees) would be listed in mutual fund disclosures to increase transparency.
The SEC asks industry professionals and interested parties to comment on new rules like this one. And in the comments section of this rule, debate is roaring.
Many of the commenters are veterans of the mutual fund industry, who threaten to stop servicing small clients if the SEC passes these new rules.
“Perhaps you would like me to give them your number to contact for service?” SagePoint Financial Branch Manager Andrea Ashbacher asks the Commission.
Others have a more tenuous connection to the debate (“my girlfriend works for a brokerage firm and she says…” writes Jack Levandowski).
Another swears – Scouts honour! – that the fees are noble, and not intended to rip anyone off. “As an Eagle Scout, I never frown upon small sized accounts and often take them on because they need the most help,” says fund advisor Todd George.
Investors on the thread fight back: “It won’t be long till the greedy hands digging in our pockets will find only lint” divines Dean Curtis. Doug Hall (affiliation: peasant) comforts himself with the fact that “when we’re broke we might get to get free soup.”
Another, Marie Dunn, gets weirdly highbrow about it: “As Upton Sinclair said, ‘It is difficult to get a man to understand something, when his salary depends upon his not understanding it.'”
So does another, who is embarassed by the mutual fund industry’s poor spelling.
“I am appalled by the number of so-called professional financial advisor commenters who cannot even correctly spell words in their one or two sentence submissions,” admonishes Stewart A. Levin.
And in case you still need evidence that the SEC’s comment section on this proposal has gotten out of control – it’s now getting spammed.
“[C]ontact me if I can be of service to you and your loved ones,” an “advisor,” Eric Gunness, bizarrely (but kindly!) offers the SEC.
We call spam on anything using the phrase “you and your loved ones.”
We’ve gotten too many emails ending with that phrase from too many complete strangers.