Definition and Examples of 12b-1 Fees
Mutual fund companies can charge 12b-1 fees to cover the costs of distributing funds and shareholder services. These are not one-time fees, but recurring charges for investors in the fund.
Distribution services include paying brokers and other intermediaries who sell the funds or exchange-traded funds offered by the mutual fund company. These fees also cover the costs incurred for advertising, marketing, printing, and mailing sales literature to new investors.
Shareholder services refer to payments made to teams that handle investor inquiries about a mutual fund, as well as providing investors with information about their investments, although shareholder service fees can also be paid outside of the 12b-1 fees.
What Are 12b-1 Fees?
The Financial Industry Regulatory Authority (FINRA), a self-regulatory organization for brokers, caps 12b-1 fees at 1% of the net assets in a mutual fund.
This 1% rate includes a distribution fee limited to 0.75% of net assets and a shareholder service fee limited to 0.25% of assets.
You can review a mutual fund’s prospectus for a complete fee schedule.
Typically, 12b-1 fees are listed in the category of “Fund Fees and Expenses.” In most cases, if a fund charges a 12b-1 fee, it will range between 0.25% and 0.75% of net assets. You can find the fund’s assets in its prospectus, usually under the category of “Fund Profile.”
Here is an example from the Keeley Funds family of funds. In the company’s prospectus for its funds, it dedicates an entire section to 12b-1 fees.
The key sentence from the excerpt above is: “Under this plan, the fees are 0.25% annually of the average net assets of the fund (calculated daily). Since these fees are paid from the assets of Class A shares of each fund on an ongoing basis, these fees will increase the cost of your investment over time and may cost you more than paying other types of sales charges.”
This sentence tells you how much you will pay in 12b-1 fees and warns you that they will impact your investment return.
Some funds issue summary prospectuses that include a table showing all fees, including 12b-1 fees. This often looks like the Keeley Fund example presented below.
A fund can charge these fees without a 12b-1 plan; however, it must include them in the “Other Expenses” category on the formal table it provides to investors.
12b-1 Fees vs. Other Mutual Fund Expenses
There are many other fees that investors in mutual funds can encounter.
Look for the expense ratio for a quick idea of how much money goes toward covering fees and expenses.
The average expense ratio for mutual funds and exchange-traded funds in 2019 was 0.45%.
12b-1 fees are typically included in the annual operating expenses of mutual funds, but you should also pay close attention to sales loads. Mutual fund companies can charge sales loads either upfront or at the back end.
Upfront, the fees are deducted from your initial investment. At the back end, the mutual fund company will deduct the sales load from the proceeds of selling your shares.
If you want a fund that does not charge sales loads, just look for no-load mutual funds.
One of the biggest differences between 12b-1 fees and sales loads is the fact that sales loads are one-time fees, paid either upfront (at the front end) or when exiting the fund (at the back end). In contrast, 12b-1 fees are paid from the fund’s assets each year you remain invested in the fund.
What Do 12b-1 Fees Mean for Individual Investors?
According to Charles Schwab brokerage, operating costs that include 12b-1 fees are the most important cost consideration for investors if they plan to hold a mutual fund for more than one year since these costs are ongoing.
Given
Because these fees are paid from the net assets of the fund, they also affect your investment return.
When making a decision about investing in a mutual fund, you should consider the 12b-1 fees along with the fund’s overall cost profile.
If you are paying high sales loads and 12b-1 fees, there may be better options, especially in the world of no-load mutual funds.
It may also be a good idea to talk to your broker or financial advisor about 12b-1 fees when discussing mutual fund investments.
In recent years, the U.S. Securities and Exchange Commission has taken action against brokers who “put their clients in mutual fund share classes that impose 12b-1 fees – which are recurring fees deducted from fund assets – when cheaper share classes of the same fund were available.”
One way to avoid 12b-1 fees and many other costs associated with investing in many mutual funds is to invest in funds that track broad indices like the S&P 500.
Because these passive mutual funds require less management by a portfolio manager than an active fund, the fee schedule, including 12b-1 fees, is lower. An actively managed fund may trade positions more frequently, necessitating a more hands-on approach and, in many cases, higher fees.
The Balance does not provide tax, investment, or financial services and does not offer advice. Information is provided without regard to the investment objectives or risk tolerance or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of loss of principal.
Takeaway
12b-1 fees are ongoing fees paid from mutual fund assets. 12b-1 fees reduce your investment return from the mutual fund. The U.S. Securities and Exchange Commission regulates 12b-1 fees and sets a limit of 1% of a mutual fund’s net assets. 12b-1 fees cover expenses incurred by the fund to assist shareholders and to pay commissions to brokers who sell mutual fund shares. You can find the 12b-1 fees for a mutual fund, along with the rest of the fee schedule and other relevant information, in the mutual fund prospectus.
Source: https://www.thebalancemoney.com/12b-1-fees-5116268
.lwrp .lwrp-list-triple{
width: 32%;
}
.lwrp .lwrp-list-row-container{
display: flex;
justify-content: space-between;
}
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: calc(12% – 20px);
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
}
.lwrp .lwrp-list-item img{
max-width: 100%;
height: auto;
object-fit: cover;
aspect-ratio: 1 / 1;
}
.lwrp .lwrp-list-item.lwrp-empty-list-item{
background: initial !important;
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
}@media screen and (max-width: 480px) {
.lwrp.link-whisper-related-posts{
}
.lwrp .lwrp-title{
}.lwrp .lwrp-description{
}
.lwrp .lwrp-list-multi-container{
flex-direction: column;
}
.lwrp .lwrp-list-multi-container ul.lwrp-list{
margin-top: 0px;
margin-bottom: 0px;
padding-top: 0px;
padding-bottom: 0px;
}
.lwrp .lwrp-list-double,
.lwrp .lwrp-list-triple{
width: 100%;
}
.lwrp .lwrp-list-row-container{
justify-content: initial;
flex-direction: column;
}
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: 100%;
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
};
}
Leave a Reply