Mutual Funds and 12(b)-1 Fees

Securities and Exchange Commission chairman Mary Schapiro recently requested that the agency draft recommendations to changes for 12(b)-1 fees. If this is an unfamiliar term for you, the 12(b)-1 fee is a charge levied on mutual fund shares to support the fund company’s marketing and advertising expenses. They were created in 1980 in order to help mutual fund companies market their funds, and were thought to be beneficial to investors. The more money a fund could pull in, the greater economies of scale it could capitalize on, thus increasing value for each investor.

Thirty years later, the jury is out on how much these fees actually help investors. Indeed, even some funds that have been closed to new investors are still charging these fees. Critics say that the 12(b)-1 fee is just an additional sales commission paid out to mutual fund salespeople. Proponents claim that these fees are fully disclosed in a mutual fund’s prospectus, and investors have the opportunity to evaluate each fund on a variety of criteria, including its fees.

So what about “no-load” funds? A fund can be promoted as “no load” even if they do charge 12(b)-1 fees. In fact, most “no-load” funds do. With rules such as this one, you can probably see why opacity is a concern when dealing with 12(b)-1 or other mutual fund fees. Additionally, the stigma that these fees have been used as an additional commission for salespeople, not a means of creating economies of scale for investors, contributes to the SEC’s decision to take a closer look.

At Fogel Neale Wealth Management, we avoid using mutual funds, and thus do not expose our clients to sales charges, 12(b)-1 fees, and other operational expenses that come out of mutual fund assets. No matter how high these fees are, they ultimately affect performance of the investment. If you have further questions on mutual funds or any other investment vehicle, please do not hesitate to contact us.

- Andrew Neale

Fogel Neale Wealth Management, LLC

The information and opinions in this communication were prepared or are disseminated by Fogel Neale Partners LLC and/or its affiliate: Fogel Neale Wealth Management, LLC (together, “Fogel Neale”). This communication is not an offer to buy or sell any security or to participate in any trading strategy. Under no circumstance should this message be construed as providing individually tailored investment advice. Fogel Neale recommends that investors independently evaluate particular investments and strategies. Sources: Pavia, J. (2010, April 5). It's time to shed some light on 12(b)-1 fees. InvestmentNews , p. 10.