Advisor Avoids Commissions In Serving Smaller Accounts

12b1 plans were created to protect investors from losses of economies of scale in bear markets but have been used to pay for distribution (rightfully the expense of the fund families) by advisors mostly unwilling, unqualifed and un-motivated to pay any continuing attention to client accounts even if they are paid a guaranteed 12b1 fee. The original purpose of 12b1 fees was to attract assets to existing funds to help existing shareholders' protect their economies of scale. If asset shrank expense ratios would likely rise so if shareholders helped the funds attract more assets the current shareholders would benefit from a lower expense ratio.That was in 1980 when the stock and bond fund industry was devastated by the volatile 1970s markets and the 1978-1982 bout with hyper-inflation. It was either bail out the stock and bond funds by subsidizing their marketing costs or some would go out of business,Stepping back and thinking more broadly those same fund families were reaching a new generation of mutual fund investors who were flocking to their money funds (the stock and bond funds were shrinking but the fund families were growing and their lawyers used sleight of hand to ignore the market realities).The stock and bond fund's marketing challenges were solved not by the 12b1 plans but by the long period of interest rate decline which began in 1982 making the 12b1 plans unnecessary. The SEC overlooked the fact these plans' purpose was passed and shareholders continued to pay the fare and on dramatically growing assets.The industry enjoyed the asset based marketing cost subsidy on increasing assets. You can understand when the banks took a pass at money funds and realized that their high expenses would not allow them to compete with money funds. So they decided "if you can't beat 'em, join 'em" and the funds used the 12b1 subsidies to pay them.The funds did the same with the expanding "financial advisor" asset gathering businesses.In addition, the same SEC-approved marketing subsidy paid for discount brokerage "no transaction fee" programs.By the time the 12b1 plans were implemented they weren't needed or justified, they long overstayed their welcome and the distribution they bought only helped the fund families.Investors got discount broker "no transaction fee" minimum holding periods and custodial costs, unqualified bank marketing recommendations never supervised by regulators and financial advisors who refused to oversee their clients' accounts legitimate needs in the highly volatile markets of the 21st Century unless they were paid more to do so.If you were a "financial advisor" and the day you recommended an asset allocation plan for your client you would earn a front-end commission and/or a guaranteed continuing 12b1 fee for "maintenance," would you take any further action.The evidence that the mutual funds in which financial advisor clients invested uniformly refuse to go to cash, hedge against downside risk or reallocate their portfolios to safer sectors is thin.Considering the huge losses experienced by financial advisor clients who "stayed the course" during both bear markets, there is little evidence that many financial advisors reviewed and/or reallocated client portfolios. Now they are saying they won't serve smaller clients or for that manner any clients after the first sale if they are paid less money. The evidence is they aren't paying attention to their clients' accounts now when they are receiving 12b1 fees.How many financial plans are designed to work if the underlying investment is generating negative long-term returns?That's 12b1's legacy to investors.Currently 12b1 buys distribution (asset gathering) but not continuing supervision and reallocation of client portfolios much to their detriment.12b1 would have been more effectively spend on investor education than on distribution. The only problem is what education the regulators will permit.Will they, for example, be forced to teach accounting guidelines such as "money, bond and stock funds are increasingly risky in that order" OR will they teach that bond funds, especially long-term US Treasury bonds are the most certainly risky investment in a market of strongly rising interest rates.Will they be allowed to teach that foreign stock ETFs in countries with strong commodity driven economies with currencies that are rising against the US dollar are good investment opportunities or recommend only 10% allocations to large-cap international funds?I just don't want investment information from government experts who approved the tragic target maturity funds.

It's pretty easy to serve the clients with smaller accounts when you already have $120mm under management. Not so easy when you are starting out and don't live in a high income area.