Why We Oppose 12b-1 Fees

The following commentary is from FoolFunds.com, the website of Motley Fool Asset Management, LLC. We are reproducing it here on Fool.com to raise awareness of the insidious 12b-1 fee, and the SEC's new proposal to limit that fee.

The Securities and Exchange Commission (SEC) recently published a new proposed rule (full text here) regarding the excitingly named "12b-1 fees" that, unbeknownst to most investors, extract approximately $10 billion(!) a year from the returns of mutual fund shareholders, without providing any improvement at all in the way the shareholders' money is invested in the mutual fund.

At the time of the proposal's publication, the commission requested industry and investor response, and we at Motley Fool Asset Management put in our two cents. (Here's the full text of our submission.) Now, if you'd like, it can be your turn to join in the fun.

Simply put, 12b-1 fees are a type of sales charge that mutual funds are allowed to impose on all shareholders of a fund, in large part to market the fund to additional shareholders. The fees are directly subtracted from the returns of the fund on an annual and ongoing basis -- in some cases, for decades. The fees may be used for a variety of purposes, including paying for administrative services, and paying brokers or other professionals who sell or otherwise recommend the fund to their clients. They are not used to improve the research of stocks bought for the fund, nor in any way to improve the performance of the money already invested in the fund.

So ...

We oppose them.

Like a substantial minority of the players in the industry, we at Motley Fool Asset Management impose no 12b-1 fees on our investors. While there is no doubt that this choice limits our ability to market our fund to as many potential shareholders as possible (if you're an Independence Fund shareholder, it is not because we paid somebody to recommend the fund to you) we take a cue from former SEC Chairman Arthur Levitt, who wrote in his book, Take On The Street: What Wall Street and Corporate America Don't Want You To Know; What You Can Do to Fight Back, "You should avoid owning shares in a fund that charges [12b-1] fees." (In the same book, Levitt credited The Motley Fool's readers and their thousands of comments to the SEC with making the difference in getting the historic Regulation Fair Disclosure (Reg FD) passed by the commission, just in case you're wondering whether this is all an academic exercise. But we digress.)

We at Motley Fool Asset Management have chosen not to utilize 12b-1 fees on three principal grounds: (1) they do not benefit existing shareholders (the owners of the fund), (2) they are insufficiently transparent to mutual fund shareholders, and (3) they hit all shareholders of any fund share class that imposes them, potentially for years after the shareholders make any investment in the fund, even those who don't benefit from the advice that the 12b-1 fees are intended to provide.

While the proposed rule won't affect our mutual fund or your returns in any way, we do feel it is important to comment on major changes that affect our industry, and, more importantly, the returns from mutual funds to individual shareholders. We want individual investors to experience the maximum benefits possible from their responsible mutual fund ownership -- even if they own the funds of our competitors.

For those reasons, we support the SEC's efforts to limit these fees -- and hope that the current proposal is but a first step in ultimately eliminating them.

We hope you are willing to share your opinion with the SEC as well. You can do so now through Nov. 5, 2010, by clicking here.

Bill Barker is a senior analyst for Motley Fool Independence Fund. The analyses and opinions presented in this article are those of the author and Motley Fool Asset Management, not of BNY Mellon Distributors, Inc.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2010, at 9:13 AM, TMFJMo wrote:

    Well said Bill, direct and to the point. Thanks for getting this out there!

    Jason

  • Report this Comment On October 15, 2010, at 3:34 PM, pondee619 wrote:

    Aren't the imposition of "12b-1 fees" clearly stated in the Fund's Prospectus? They have been in each prospectus I read. Those funds that had them, I avoided. Can't others, letting the market place take care of these fees?

  • Report this Comment On October 15, 2010, at 5:17 PM, edshock wrote:

    It's interesting to hear your comments, but let me give you a perspective from an advisor.

    My first comment is what is paid to an advisor that falls under the label of 12-b1 fees has almost always been misnamed. I believe that they should be refered to an a "service fee"

    What is done for the client is first to reccomend a fund, specifically a "load fund", that pays a commission up front. It's a nominal fee for the time and service that has been given to the client by helping the client first understand something about their personal risk tolerance, the time frame in which the clients is working, and then finding a fund with reasonable fees and charges for them.

    My relationship to these clients does not end here but continues years long to continue to answer their questions, process their additions or withdrawels, and continue to keep these clients up to date on what their funds are doing.

    Over the years I have accumulated many smaller accounts - values from $1000 - 25,000 - that would not have any assistance if it were not for the .0025% of their fund value which is paid out to me and comes as part of the 12-b1 fees.

    I have heard alot about the billions! of dollars paid out, but from another perspective on a $25,000 account for the services performed about the client will pay $62.50 a year.

    Yes, I am also in favor of these fees being fully disclosed and clear to a client. However, I do feel that the "Service-Fee -as it should be called - is very fair and reasonable to these clients that need the services and help of advisors.

  • Report this Comment On October 17, 2010, at 8:38 AM, newth3 wrote:

    I have worked in operations for a fund company and a large bank trust department for many years. I have seen 12b-1 fees from both a positive and negative vantage point.

    There are investment applications such as 401(k) recordkeeping that use 12b-1 fees to cover expenses that would otherwise have to be passed on to the participants. Either way many plan sponsors would find it difficult to absorb these expenses without some offset.

    I have also seen situations where investment managers with fiduciary responsibilities collect 12b-1, or shareholder service fees from the funds in their "approved" lists. Yes, 12b-1 fees and shareholder service fees are different and the shareholder service fees may be paid by the advisor, rather than directly from the fund. But the advisor is paid by the fund.

    There is so much money available that it sometimes clouds decision making and the envelop gets stretched (or torn).

    We could use better enforcement of existing regulations. Better transparency of all fund fees. Better consumer education...Thank you Motley Fool.

  • Report this Comment On October 09, 2014, at 8:12 PM, grousey wrote:

    I have no problem with the fact that advisors should be paid for their service. But the big issue is why hide it. Tell the investor upfront what the 12B1 fees are. I have had over 200K in a Mainstay investment for the last fourteen years, I was told there were no fees associated with my account since I paid an upfront load fee of around 2%. I am scrupulous about reviewing my statements and I have never seen any transaction to my account for any fees. Obviously I would not know how much of a reduction in my account was due to market conditions and how much I paid Mainstay for 12B1. I find the lack of full disclosure and the SEC allowing this very disturbing. What ever happened to transparency? This is just wrong..

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