Do Mutual Funds Overcharge Us With 12b-1 Fees?

Do Mutual Funds Overcharge Us With 12b-1 Fees?

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Poor disclosure habits in the investment world may mean that we see some changes. Regulators Have been taking a closer look at the fees that investors pay. The fee that is getting a lot of attention now is known as a 12b-1 fee.

What is a 12b-1 fee?

The Securities and Exchange Commission (SEC) began allowing mutual funds to charge 12b-1 fees back in 1980. The name comes from the SEC rule that authorizes the fee.

The fee was originally assessed to cover expenses related to distributing mutual funds. This can include the costs of marketing, advertising, and promoting the mutual fund. The fee also covers the printing and mailing of fund prospectuses and sales literature. In addition, brokers are often paid a portion of their commission from the fund's 12b-1 fee. The limit on this portion of the fee is 0.75%.

The fee may be collected for other shareholder services, such as making sure that representatives are available to respond to investor questions or requests. There is a 0.25% limit on this section of the fee.

Where can I find out if I am being charged a 12b-1 fee?

According to Lipper, about two-thirds of mutual funds assess a 12b-1 fee. Mutual fund companies are required to list the 12b-1 fee in the fund's prospectus. While it is listed separately, the 12b-1 fee is also included in the fund's gross expense ratio.

Protecting consumers

Since so many consumers are unaware of the fees they pay for their mutual funds, the SEC is thinking about requiring better disclosure of the fee.

The organization has also considered the possibility of eliminating the fee. While the fee was originally intended to help with advertising and promoting mutual funds, very little of the fee is actually used for that today. The majority of the 12b-1 fee is passed on to brokers who sell the funds.

There is a concern that if brokers are provided with extra compensation for selling certain investment products, there is a stronger likelihood of a conflict of interest arising out of the broker's recommendation.

Not an immediate red flag, but...

The fact that a fund has a 12b-1 fee is not an automatic deal-breaker. Some funds carry these fees and still have low costs overall. However, in a time where high returns are not the norm, larger fund expenses can severely impact the overall gain in an investor's account.

For example, a $10,000 investment earning an average of 8% interest per year over 20 years would grow to $46,609.57. If the fund carried a 1% 12b-1 fee that lowered the average interest rate to 7% per year, the gain would only grow to $38,696.84. The long term effect of the 12b-1 fee is significant.

While investors should seek out advisors who are trustworthy, it is still important for investors to research the investments they carry to ensure that the decisions made on their behalf truly are in their best interest.

About the Author:
Ozeme J. Bonnette is a financial coach, speaker, and author of Get What Belongs to You: A Christian Guide to Managing Your Finances. After working for a top financial services company, she shifted her focus to speaking to groups hoping to increase financial literacy. She earned 3 Bachelor's degrees at Fresno State, and her MBA at UCLA's Anderson School. Her blog is http://www.povertynorriches.com. Reach her at ozeme@thechristianmoneycoach.com.



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