Investors and analysts say money managers aren't likely to be slammed by a pending Securities and Exchange Commission review of 12b-1 fees they think will focus on improving disclosure, but regulators have left the door open for more far-reaching changes.
SEC Chairwoman Mary Schapiro has been promising a review of 12b-1 fees, introduced in 1980 to help a struggling mutual fund industry cover distribution and marketing costs, since she assumed her post in January 2009.
Noting that investors may have little understanding of what money managers are doing with 12b-1 fees, which have averaged more than $10 billion a year over the past five years, Ms. Schapiro said in a February speech, “We need to critically rethink how 12b-1 fees are used and whether they continue to be appropriate.”
Scrapping 12b-1 fees altogether would have a “huge impact”" on the industry, with the 25 basis points typically charged accounting for up to 25% of a fund company's overall fees for managing mutual funds, said Chris McNickle, a managing director with Greenwich Associates, and head of the Stamford, Conn.-based strategic consulting firm's investment management practice.
Sell-side analysts cite Franklin Resources Inc., Legg Mason Inc., Waddell & Reed Financial Inc. and Calamos Asset Management Inc. as firms that would be vulnerable if 12b-1 fees were eliminated.
A Feb. 25 report by Kenneth B. Worthington, who covers asset managers for New York-based J.P. Morgan Securities Inc., noted that 2009 12b-1 fees of $1.1 billion were collected by BlackRock, Inc., $596 million by Franklin Resources, $412 million by Legg Mason and $361 million by AllianceBernstein Holding LP.
In a March 30 report, Robert Lee, an analyst with New York-based Keefe, Bruyette & Woods Inc., noted that 70% of Waddell & Reed Financial's assets under management are in mutual funds which charge 12b-1 fees, followed by Calamos, at 49%; Franklin Resources, at 41%; Invesco Ltd., at 26%; Eaton Vance Corp., at 25%; Legg Mason, at 19%; and Federated Investors Inc., at 18%.
For now, most observers say they don't expect the SEC to kill 12b-1 fees outright.
With “entire distribution networks” built on 12b-1 fees over three decades, it's difficult to see those fees being swept away, or even changed in a way that would have a meaningful impact on profitability, said Mr. Lee in an interview.