What is a 12B-1 fee?
Fees 12b-1 are annual fees for marketing or distributing on a mutual fund. Fees 12b-1 are considered to be operating expenses and as such are included in the fund’s expense ratio. It is generally between 0.25% and 0.75% (the maximum allowed) of the fund’s net assets. The fees are named after a section of the Investment Company Act of 1940.
Understanding fees 12B-1
At the very beginning of the mutual fund business, fees 12b-1 were supposed to help investors. It was believed that by marketing a mutual fund, its assets would increase and management could reduce expenses due to economies of scale. This remains to be proven. With mutual fund assets exceeding $ 10 trillion and growing steadily, critics of these fees are seriously questioning the rationale for their use. Today, fees 12b-1 are mainly used to reward intermediaries for the sale of shares in a fund. As a commission paid to sellers, it is currently supposed to do nothing to improve the performance of a fund.
In 2020, the Securities and Exchange Commission (SEC) began examining the use of 12b-1 fees to determine if the rules for charging these fees are being followed and whether the presence of these fees is properly disclosed.
Fresh 12b-1 broken down
The 12b-1 fees can be divided into two separate fees: distribution and marketing fees and service fees. The total of 12b-1 fees charged by a fund is limited to 1% per year. The share of distribution and marketing of fees is capped at 0.75% per year, while the portion of service fees of fees can be up to 0.25%.
Use of 12b-1 in stocks sold by brokers
Class B and C shares of funds sold by dealers generally have a 12b-1 charge, but may also be charged on free mutual fund shares and Class A shares sold by brokers.
Class A shares, which generally charge an initial charge but no principal charge, may incur reduced fees of 12b-1 but generally do not have a maximum charge of 1%. Class B shares, which generally do not have a front-end but charge a back-end charge that decreases over time, often have 12b-1 fees. Class C shares generally have the highest probability of supporting the maximum commission of 1% 12b-1. The presence of 12b-1 fees frequently pushes a fund’s overall expense ratio to more than 2%.
The Calamos Growth Fund is an example of a fund that charges 0.25% 12b-1 on its Class A shares and charges a maximum of 1% 12b-1 on its Class C shares.
What is the fee 12b-1 for?
Distribution fees cover marketing and payment brokers who sell stocks. They also turn to advertising the fund and distributing the fund’s documentation and prospectuses to clients. Shareholder service fees, another form, specifically pay for the fund to hire people to respond to investor inquiries and disseminate information if necessary, although these fees may be charged without adopting a 12b- 1. Another category of fees that may be billed is called “other expenses.” Other expenses may include costs associated with legal, accounting and administrative services. They can also pay the transfer and custodian fees.