What will happen to 12b-1 Fees?

With the SEC proposing to limit “marketing and service” service fees to .25 % a year on mutual funds and completely scrapping 12b-1 fees, a new outlook may peek through the cracks for RIAs and financial planners who generate their revenue off “asset based fees”. In this industry, this has been the talk of the town since late July.

I noticed this article on www.fa-mag.com today and found that they left out what I feel is one of the most viable ideas to come forward recently. They discuss the increased in (commission-free) annuities. According to the article, ” The annuity allows advisors the flexibility and choice of working with clients to establish service relationships and how [clients] want to pay for that advice”.

I am not sure what the average RIA would want to charge for advice, but common sense would lead me to think that a advice-based fee structure would ultimately be similar revenue to what 12b-1 fees were generating. I see a missed opportunity in this article. Often times commissions (while thought of in a negative light) can ultimately be much cheaper to the client than annual fees charged for money management.

Commissions don’t always need to be taken in a lump-sum fashion. Many advisors take trails on commissions, which will pay out a small up front commission, and then a .50 to .1% annual commission based on the FMV of the annuity. While priced into the annuity, it does not directly come out of the client’s annuity value. When an annuity is appropriate for certain retirees, a  fixed or fixed index annuity can be a very beneficial way for an RIA or asset manager to annuitize their business, while giving risk-averse clients added benefit through principal protection.

There are various product arguments that could be made in the context for using different annuities for retirees, but this has little place for what I am discussing as an alternative to the SEC making 12b-1 fees extinct for financial planners, RIAs or anyone that makes a living off of asset management fees.

I found it interesting that the article only referenced commission-free annuities when trail commission annuities may offer much more value to the RIGHT consumer despite the negative stigma of a commission. This may also help in maintaining a level of revenue for the advisor.

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