We're still sifting through the SEC's ambitious rules proposals for mutual fund distribution fees; our initial thoughts follow, and we'll have more on this in the weeks to come.
First a little background. The fund industry has developed a rather odd fee setup over the decades, which differs from the more straightforward commissions you see with ETFs and stocks. One key feature is that the fund company collects broker commissions along with its own fees at the same time. If you buy a stock or an ETF, the per-share commission goes directly to the broker, not through the corporation or ETF provider. In addition, stock commissions were once mandated, but that was dropped in the 1970s. Today there's competition, and commission size is based on the level of service.
In the fund world, the fund company collects broker commissions along with its own fees at the same time. Then, the fund company deducts fees from your fund assets and funnels continuing service fees to brokers. The sales load is the same everywhere; brokers don't have to compete. Nor do they compete for the service fee, the 12b-1, which stays the same no matter the size of the fund, size of the investor, or level of service. Fee-based planners represent a notable exception to this system: They set their price and charge clients directly outside of the fund's fee structure.