Posted by on May 30, 2017 in Articles & Advice, Blog, Featured, Posts |

By Jason Zweig  |  May 29, 2017 10:13 pm ET

Image credit: Pixabay

Here, from my archives, is one of the earliest articles I wrote on bizarre investing costs — in which a clever financial planner figured out how to enable his estate to continue to collect 12b-1 fees on his clients’ mutual funds even after he died.

Not long afterward, I received a letter — people still wrote letters in those days — from a reader who had originally bought Massachusetts Investors Trust, the earliest mutual fund in the U.S., back in the 1930s. He wanted to know why, more than a half-century after he had bought the fund and more than 30 years after his broker had died, he was paying a 12b-1 fee. I no longer have the letter he sent me, but I distinctly recall the main question he asked so plaintively: “Didn’t I already pay for distribution — back when FDR was president?” 

No wonder mutual funds lost ground to ETFs. There’s another disturbing question looming now, though: How long will it take for ETFs to get junked up with opaque, confusing, and nonsensical fees the same way mutual funds did? (My guess: another two to five years, at most.)

Night of the Living Fees

Forbes Magazine, July 19, 1993


When mutual-fund operators asked for permission to dip into shareholders’ assets to finance their marketing efforts, they offered this justification: Spending money to sell more fund shares would benefit all shareholders by spreading the overhead over more assets.

Since small, nimble funds often outperform big ones, the
thesis was questionable to say the least. Who knows whether the Securities and Exchange Commission really believed the nonsense about soaking shareholders in order to save them, but it did enact Rule 12b-1 in 1980, permitting the distribution fees.

What has happened since has made a farce of the industry’s legal reasoning. Hundreds of funds that have imposed 12b-1 fees have managed to increase, not lower, their expense ratios in the course of trying to expand their assets. Nearly a dozen fund operators — including American Capital, Calvert and First Investors — even impose 12b-1 fees on some of their funds that are closed to new
investors, entirely negating the theory that existing shareholders will benefit as assets increase.

And now, the ultimate absurdity: A broker has figured out how to keep collecting a 12b-1 servicing fee from his clients even after he is dead.

The financial innovator is Bert Miller, 48, a financial planner and
president of Miller-Green Financial Services in Houston. Miller figures he sold $7 million to $8 million in funds in 1992. He should earn about $50,000 in 12b-1 fees this year, most of them in the form of trailing fees collected, like an insurance salesman’s renewal commissions, for years after a client has bought a product. A nice, fat annuity. But Miller, who is also a certified public accountant, figured out how to extend the annuity beyond his own lifespan. “I was working on my own estate planning,” he says, “and I realized that once I died, all my trails that I’ve worked so hard for would just go up in smoke.”

When a broker dies, his estate is normally cut off from the 12b-1 fee
stream. Instead, his firm collects the fees itself or reassigns them to a new broker. That makes sense. How can a dead broker provide any service to his fund clients?

But Miller, who is in good health, persuaded FSC Securities Corp., the Atlanta-based broker/dealer that clears trades for his firm, to agree to pay his 12b-1s to his family (he has a wife, Gilda, and three children) after his death. FSC went along because Miller was a sterling producer and it didn’t want to offend him.

There was a hitch. What if, after his death, without Miller around to keep them in line, some of the clients switched brokers? The funds would divert the 12b-1s to the new brokers. Miller thought of an elegant way out: He cut a deal with one of his partners, James Huston, specifying that all of Miller’s clients will be assigned to Huston if Miller dies. Huston agreed to turn over to Miller’s family all the 12b-1s earned on fund sales predating Miller’s death. And Miller’s family agreed to let Huston have the 12b-1s on new sales of financial products to these clients. Says Miller: “That gives him the incentive to treat my clients well even after I’m dead.”

That’s lovely, but here’s a system that treats you better still: Don’t pay sales loads at all, either front-end, back-end or the repetitive-injury 12b-1 type. There are hundreds of no-load funds to choose from. If you need help, see a financial planner who charges by the hour only.


Source: Forbes Magazine, July 19, 1993



Definitions of FEE and FINANCIAL ADVISOR in The Devil’s Financial Dictionary

Fee Madness

Why Do Mutual Funds Cost So Much?