AIM Board Slashes 12b-1 Fees: Post-Scandal, Firm Fights to Regain Former Glory
July 18, 2005
Fund boards are starting to show their teeth.
In its latest effort to dig itself out of the gaping hole left by a painful bear market and a series of trading improprieties, AIM Investments has slashed 12b-1 fees on the bulk of its mutual funds.
The Houston-based fund complex, a subsidiary of UK investment management firm Amvescap, wrote in a July 1 letter to shareholders, that, after a comprehensive review of fees, the board of trustees for the AIM Funds has approved a proposal to reduce all 12b-1 fees on its class A shares to 25 basis points, a move that brings them in line with the industry average. The markdown, effective immediately, is "permanent" and also extends to class A3 shares and the AIM Summit Fund.
The fee cuts come amid unrelenting pressure from regulators and investor advocates for fund boards - often thought of as being rubber-stamps for management - to be more vigilant of shareholder interests and hold fund management accountable in the wake of pervasive scandal.
"With these fee reductions, we hope to continue delivering solutions for your investment goals at a lower cost," wrote CEO and President Mark Williamson and Bruce Crockett, chairman of the board for the AIM funds.
In addition, the company lowered expenses on several other funds, including the AIM Large-Cap Basic Value, AIM Large-Cap Growth and AIM Premier Equity funds, as well as investor share classes of the AIM Technology Fund. However, these fee cuts, while also effective July 1, will be in effect for at least the next 12 months, AIM said.
Originally drafted to defray the costs of marketing and advertising for mutual funds, Rule 12b-1 has morphed into a means for paying brokers that sell a company's funds, a practice that has drawn the ire of the Securities and Exchange Commission, NASD and state attorneys general.
The move follows AIM's sweeping $15 million annual reduction of advisory fees in December 2004, a stipulation of its market-timing settlement with New York Attorney General Eliot Spitzer. All told, AIM and its now-defunct sister company Invesco paid $451.5 million in fines, fee cuts and restitution for allegedly allowing preferred customers to trade rapidly in and out of its mutual funds, violating its prospectuses and bilking long-term shareholders.
AIM and Invesco have also faced a number of class-action lawsuits alleging that the advisor breached its fiduciary duty by collecting excessive marketing, distribution and other advisory fees from the funds after the funds were closed to new investors, thereby reducing liquidity and performance.
But the scandal was not the fund manager's only problem. Having been predominantly a growth shop during the 1990's, AIM was hammered by the collapse of the technology sector and the prolonged bear market that ensued. As a result, its funds have been hemorrhaging assets at an alarming rate. In the period extending from January 2003 to May 2005, AIM (including Invesco) has lost $27.2 billion in assets, according to Financial Research Corp. of Boston (see chart, below). Since the scandal broke in September 2003, AIM's funds have suffered a massive $23.1 billion outflow.
When the Invesco funds were merged into the existing AIM funds, there was a disparity between their 12b-1 fees; Invesco funds charged 25 basis points, whereas AIM funds were banging their shareholders out for 35 basis points. This new move to reduce 12b-1 fees across the fund complex helps to better align prices across the board.
"This is going to make them more competitive," said Karen Papalois, a mutual fund analyst at Chicago-based fund researcher Morningstar. "Lower fees should shine through in their performance. This is something we are going to see more of in the industry, as funds look harder to compete, especially in a low-return environment."
Consistent with its efforts to improve performance and lower costs for shareholders, AIM has also made some changes to its breakpoint discount policy and folded eight of its most poorly performing funds into other AIM funds.
Hard Look at the Contract
"We were very aggressive with respect to the fees and the cost structure," Crockett told MME in an interview. "We just went through the contract renewal process and thought the 12b-1 fees were too high." The voluntary trimming of 12b-1 and other fees will result in annual savings of between $22 million and $23 million, on top of the cuts mandated by Spitzer's office, Crockett said.
If the performance is bad and fees are too high, funds will soon suffer net outflows, he said. "You don't make money if you're cashing out shareholders all the time."