What Is a 12B-1 Fee?
A 12b-1 fee is an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is viewed as an operational expense and, in that capacity, is remembered for a fund's expense ratio. It is generally somewhere in the range of 0.25% and 0.75% (the maximum permitted) of a fund's net assets. The fee gets its name from a section of the Investment Company Act of 1940.
Grasping 12B-1 Fees
Back in the beginning of the mutual fund business, the 12b-1 fee was remembered to help investors. It was accepted that by marketing a mutual fund, its assets would increase and management could bring down expenses as a result of economies of scale. This presently can't seem to be proven. With mutual fund assets passing the $10 trillion mark and developing consistently, pundits of this fee are truly scrutinizing the legitimization for utilizing it. Today, the 12b-1 fee is essentially used to reward go-betweens for selling a fund's shares. As a commission paid to salespersons, never really upgrading the performance of a fund is at present accepted.
In 2015, the Securities and Exchange Commission (SEC) started looking at the utilization of 12b-1 fees to decide whether the rules for charging these fees are being complied with and the presence of such fees is appropriately unveiled.
12b-1 Fee Broken Down
The 12b-1 fee can be broken down into two distinct charges: the distribution and marketing fee and the service fee. Total 12b-1 fees charged by a fund are limited to 1% annually. The distribution and marketing piece of the fee is capped at 0.75% annually, while the service fee portion of the fee can depend on 0.25%.
Utilization of 12b-1 in Broker-Sold Shares
Class B and class C shares of representative sold funds regularly have 12b-1 fees, however they may likewise be charged on no-load mutual fund shares and class An intermediary sold shares.
Class A shares, which generally charge a front-end load yet no back-end load, may accompany a decreased 12b-1 expense however normally don't accompany the maximum 1% fee. Class B shares, which ordinarily carry no front-end except for charge a back-end load that declines over the long haul, frequently accompany a 12b-1 fee. Class C shares ordinarily have the best probability of carrying the maximum 1% 12b-1 fee. The presence of a 12b-1 fee regularly pushes the overall expense ratio on a fund to above 2%.
The Calamos Growth Fund is an illustration of a fund that conveys a more modest 0.25% 12b-1 fee on its class A shares and charges the maximum 1% 12b-1 fee on its class C shares.
What 12b-1 Fees Are Used For
The distribution fee covers marketing and paying brokers who sell shares. They additionally go toward advertising the fund and mailing fund writing and prospectuses to clients. Shareholder service fees, another form, explicitly pay for the fund to hire individuals to respond to investor requests and disseminate information when vital, however these fees might be required without the adoption of a 12b-1 plan. Another category of fees that can be charged is known as "different expenses." Other expenses can incorporate costs associated with legal, accounting, and administrative services. They may likewise pay for transfer agent and custodial fees.