When brokers sell a mutual fund with a 12b-1 fee, their clients are paying a fee for ongoing service, which, of course, is provided by the broker. Yet firms pocket part--and sometimes all--of 12b-1 fees.
The standard practice is to put 12b-1 fees on the mutual fund payout grid and distribute it quarterly to brokers. Like commissions, the firm then keeps the rest.
But not all 12b-1 funds are alike. At Edward Jones, brokers say they receive none of the 12b-1 fees on B-share funds. A firm spokesperson disputes that, however, saying reps get a lower payout on B-share trails. Details on what that payout is were unavailable. Normally, Jones pays out a standard 40% of 12b-1 fees to all brokers.
At Prudential Securities, the firm keeps more of C-share fund service fees than it does A- or B-share service fees. After receiving the full 25 basis point fee the first year on a C-share fund, explains Stephen Fisher, a Prudential Investments senior vice president, the firm keeps 5 basis points each subsequent year and the broker is paid on the remaining 20 basis points according to the payout grid.
Firms have had a tougher time deciding who gets 12b-1 fees when a fund is placed in a mutual fund wrap program. Many have implemented policies that result in neither the broker nor the firm receiving any 12b-1 payments, a change over the past two years.
Under the wrap umbrella, Merrill Lynch converts all its 12b-1 funds to A shares. Prudential Securities waives 12b-1 charges to clients. PaineWebber discounts its wrap fee by the amount of any 12b-1 charges, according to brokers. PaineWebber won't comment on broker compensation. At EVEREN, whenever a 12b-1 fund is put into the firm's fund wrap program, the firm puts all 12b-1 fees on the client's statement as a cash deposit.
"The broker's decision on the appropriate funds for a client's allocation shouldn't look like it affects the broker's compensation," says Wayne Morris, EVEREN director of consulting services.
Dain Rauscher and A.G. Edwards won't allow funds with 12b-1 fees to be put into their wrap programs.
But some firms still pocket 12b-1 fees in their wrap programs. One Salomon Smith Barney broker reports that the firm not only keeps 12b-1 fees charged in its mutual fund wrap program, but doesn't pay out any portion to brokers.
"I think it's b.s.," says the broker. The firm says brokers receive a portion of the service fees but declined to provide details of what reps get, including whether reps get paid trailers from wrap accounts.
Raymond James also allows 12b-1 funds in its wrap program, and brokers never see any of the fees, brokers report. "They argue we don't want to double dip," says an independent broker in the Northeast who clears through Robert Thomas, using Raymond James' wrap program. "I can understand that argument, but rebating the fees to the customer would be the logical thing." The broker says he now no longer will choose 12b-1 funds for clients.
"The firm can't seem to work without a hidden profit," he gripes.