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Why We Oppose 12b-1 Fees

By Motley Fool Asset Management - Updated Nov 9, 2016 at 6:53PM

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This little sales charge doesn't benefit existing shareholders and is insufficiently transparent.

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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