What Are "12b-1 Fees?"

Another factor to consider when choosing a mutual fund are its 12b-1 fees, which are basically money the fund managers take out to pay for running and marketing the fund.

Vanguard says:

    “Some funds charge a 12b-1 fee to pay the fund’s marketing and distribution costs. This fee, which is incorporated into the expense ratio, can include a sales charge to compensate sales people.”

Feeling looser with its tongue, the Securities And Exchange Commission says:

Distribution [and/or Service] Fees (“12b-1″ Fees) — fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares and sometimes to cover the costs of providing shareholder services. “Distribution fees” include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. “Shareholder Service Fees” are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.

It’s important to know the fees involved with a mutual fund, 12b-1 among others, as it can dip into the total profit you might gain (or increase what you might lose).

The SEC again:

Be sure to review carefully the fee tables of any funds you’re considering, including no-load funds. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858 — an 18% difference.

With NADS’s free online Mutual Funds Fee calculator, you can compare up to three funds and their various fees based on how much you invest and how long you plan on holding them.

PREVIOUSLY: What Is “R-Squared?”

Comments

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  1. TechnoDestructo says:

    Sales literature?

    Who buys a mutual fund because of what a salesman says?

    Prospectuses, yeah, that’s important. But honestly, WTF?

    I hate people sometimes. (Always)

  2. alpha says:

    the “load” of a fund is important too.
    Many funds are no-load, but some are front or back load funds. From what I hear, those with loads are more likely to have 12b-1 fees as well, so you get the double whammy (and not in a good way)

  3. Ben Popken says:

    Will writes:

    “It’s true that they contribute to a fund’s expense ratio, and investors should always pay attention to a fund’s administrative charges when they invest. These fees in particular, however, are a bit more pernicious. While most funds charge fees so they can conduct market research, pay their staff, etc.–all legitimate and positive things to do–12b-1 fees are often paid to the individual broker or firm that you used to place your order. That means that if you call up your broker and say, “Buy me 100 shares of the Bank ABC fund,” your broker could receive a payment from Bank ABC for bringing in a new investor, all without your knowledge.

    I don’t think I need to point out where a conflict of interest exists here. If you’re accepting advice from your broker, and he or she tells you that a certain mutual fund looks great, you’d be a fool if you didn’t know the 12b-1 structure that your broker deals with. Your broker is a businessperson, and he or she will do everything that’s possible and legal to make a buck. If they get paid when you buy a fund, they’re more likely to recommend that fund. Period. Financial advisors can be used with great effect, and they can be a valuable tool. But they, like you, are out to get paid as well as possible. It’s always the investor’s responsibility to make sure that the interests of his advisers are aligned with his own.”

  4. skittlbrau says:

    @Ben Popken: an investor should be carefully reading their mutual fund’s prospectus, which clearly outlines fees (including 12b-1) that will be charged out of the fund’s NAV.

    the only way your broker would be being paid from a 12b-1 fee without your knowledge when investing would be if you did not a) read and b) understand the prospectus.

  5. Welcome_to_Oakas says:

    Whoa Ben, you can’t jump from r-squared to 12b’s!
    12b’s can be used to compare funds, but r-squared is meaningless unless you also look at beta (and alpha).
    VFINX (a SP500 index) and RYURX (an inverse SP500 index), for instance, both have a r-squared of one. When the SP500 goes up, VFINX will follow, but RYURX will go down since it’s an inverse index. Use google finance to plot them and you’ll see they are mirror images. The beta is what tells you the relation to the index. In this case VFINX is about 1 and RYURX is about -1.