ICI: Advisors Get Most 12b-1Fee Revenue

February 24, 2005 (PLANSPONSOR.com) - A new study by a trade group revealed that the overwhelming share of 12b-1 mutual fund fees are being spent to pay financial advisers or other intermediaries for helping shareholders.

A news release from the Investment Company Institute (ICI), a fund company trade group, said only a small amount of the fees are used for advertising and promotion.  The ICI studysaid the fees generated $10 billion in 2004.

According to the ICI, 40% of the fees are used to pay financial advisors for their initial fund purchase help (a separate ICI survey found that 80% of investors holding funds outside of retirement plans use an advisor), 52% goes for ongoing shareholder services, 6% is allocated to fund underwriters and 2% goes to promote and advertise the funds. ICI said a 2000 survey found that fund were using 5% of the fees for promotion and advertising.

ICI said the funds paid to advisors were for valuable services rendered. “Financial advisors typically devote professional time and attention to prospective mutual fund shareholders before they make an initial purchase,” ICI wrote. “The advisor generally meets with the investor, identifies financial goals, analyses his or her online investments, determines an appropriate asset allocation, and selects and recommends a fund or funds to meet those goals.” ICI said underwriters typically either make a single payment to advisors when the investor buys the funds or spread out those payments over time for as long as the investor holds the shares.

Of the 52% devoted to ongoing shareholder services, 93% goes to broker dealers and bank trust departments while the rest is paid to retirement plan recordkeepers, fund supermarkets and discount brokers. Some 82% of assets used for ongoing shareholders services come from 12b-1, ICI said.

ICI Chief Economist Brian Reid said that the typical front-end sales load has declined from 8% in 1980 to 5% in 2004. “Over the past 25 years, as fund assets have grown 60-fold, total 12b-1 fees have registered strong growth,” Reid noted in the news release.

The survey is based on responses from mutual fund complexes that manage 75% of the assets of mutual funds with 12b-1 fees, according to ICI.