Fears that new SEC rules could ding asset managers’ profitability are misguided, according to a new report from investment bank Keefe, Bruyette & Woods.
“We believe that these concerns are largely overdone,” say report authors Robert Lee and Larry Hedden.
The researchers’ comments center around anticipation that the Securities and Exchange Commission will issue new rules limiting mutual funds’ 12b-1 distribution fees. The final form of the SEC's proposals is unknown, and “many things could change” by the time any changes are made known, the authors say.
Earlier reports by KBW have argued that, based on prior proposals, the main long-term impacts on most asset managers would be twofold: incremental costs associated with implementing some of the proposals, and higher redemption rates to the extent that proposals drove business to fee-based accounts.
But the overall impact to many asset managers “could be modest,” according to Lee and Hedden.
Discussion of possible SEC proposals comes at a time when many of the stocks of asset managers have lagged somewhat. In the first quarter of 2011, more than half of the companies KBW studies had positive long-term asset flows, and earnings power and positive trends prevailed at many managers. Yet asset-management stocks continued to languish, the report notes.
Backing up their assertion that the impact of new 12b-1 rules would be modest, the researchers estimated asset managers’ exposure to assets under management with greater than 25 basis points of 12b-1 fees (the SEC considers assets under that threshold to be reasonable and acceptable).
Their analysis suggests that most asset managers' exposure to changes in 12b-1 fees should be modest. Waddell & Reed emerged from the study as the firm with the largest relative exposure, as measured as a proportion of total assets under management.
Other factors that will limit exposure include the fact that an increasing proportion of fund sales are taking place through fee-based accounts. These purchases are of share classes that either don’t have 12b-1 fees or have relatively low ones.
Indeed, because of the trend away from sales of share classes with hefty 12b-1 fees, the SEC to some extent “may be tackling a perceived issue that is already in decline,” the report notes.
Another signal that impact could be limited arises from the SEC's original proposals. They contained a fairly lengthy phase in-period between initial adoption of rules, their implementation, and the grandfathering of existing assets.
What’s more, the original proposals suggested that fees higher than 25 basis points could be charged for a period of years. As a result, the total incremental fees over the 25 basis points would be no greater than the maximum on a front-end load.
Assuming C-shares are the share class most impacted by prospective changes, and assuming a 5.75% maximum front-end load, the incremental fee of 75 basis points per year could remain in place for 7.7 years, the authors note. That is well in excess of current average mutual fund holding periods.