A Change of Direction
October 15, 2001
Fremont had not always intended to peddle its funds through fee-only investment consultants and financial planners. Fremont's roots actually trace back to its serving as the investment manager for the pension plan of engineering firm Bechtel Corp.
In 1988, in response to the urging of former Bechtel employees, Fremont debuted its first retail mutual fund for those who wanted to leverage the manager's expertise and invest money outside Bechtel's retirement plan. Along the way, Fremont gradually added other 100% no-load mutual funds to its growing family, initially intending to distribute them directly to retail investors.
But Fremont realized that it was an expensive proposition to compete for direct retail investors. The firm determined that it would make sense to build in a 12b-1 fee component to three of its newer funds. "The fund's administration had decided that it would help defray some of the marketing costs," Hughes noted. But the strategy backfired in light of Fremont's later acceptance into the 12b-1-fee financial planner channel.
12b-1 plans have become an industry standard for many funds. According to Morningstar, about 62% of all open-end funds (excluding money market funds and variable annuity portfolios) currently have some type of 12b-1 plan in effect.
While it is highly unusual for a fund advisor to abolish its 12b-1 plan, it isn't altogether unheard of, say industry analysts. According to both Lipper and Morningstar, several funds have eradicated their 12b-1 fees over the past few years, including several of the AmSouth Funds, Goldman Sachs Funds, and Frank Russell Funds, as well as the Yacktman Fund, the Thurlow Growth Fund, and the Delafield Fund.
Fund companies will often launch a fund which, by prospectus guidelines, is allowed to charge a 12b-1 fee. But some choose to never actually implement that 12b-1 charge, said Jeff Keil, VP of portfolio evaluation and board reporting with Lipper. Others may implement the allowable 12b-1 fees, but may cap those 12b-1 expenses, he added.
Even fewer terminate their existing 12b-1 plans outright, largely because of the time and expense necessary to reinstall (or install for the first time) a 12b-1 program if it is desired in the future, Keil noted.
But there are legitimate reasons why fund groups decide to exterminate their 12b-1 plans.