What is a 12b-1 tax? | Mutual fund


Fees are something every investor should be aware of. If you are considering investing in a mutual fund, for example, you might see a specific type of fee attached: a 12b-1. What is the 12b-1 fee and what do you pay when you choose to invest in this fund?

The answer comes from a SEC rule of the same name, which allows managed funds to charge marketing, distribution and administration fees. These charges generally range from 0.25% to 0.75% and are included in the expense ratio of the fund. This is not always evident in a cursory valuation of the fund, which is why it is beneficial for investors to dig deeper.

Here’s what you need to know about 12b-1 fees, why they’re charged, and what their purpose is in managed funds these days.

A brief history of 12b-1

The 12b-1 fees were actually designed to benefit investors. The money raised through the fees originally financed the fund’s marketing expenses. The more the fund is marketed, the more assets are under management and the higher the returns. It was a worthwhile expense at the start of its implementation.

Today there is more money than ever in investment funds. As a result, the 12b-1 fee is no longer really a “marketing” expense. Today it is used to justify commissions to fund managers who actively trade fund holdings. The justification for this expense is on more fragile ground these days. In 2015, the SEC actually opened an investigation to determine if the 12b-1 costs were justifiable at all. It is likely that we will see the end of SEC 12b-1 rule in the future and with it the 12b-1 fee.

To get around the 12b-1 fee to justify the commissions, many funds use them to cover “other” expenses. This can include legal, administrative, accounting and more. As long as the fee proceeds contribute to the growth and administration of the fund, they comply with the acceptable guidelines of SEC Rule 12b-1.

How to invest with 12b-1 in mind

Many investors evaluate mutual funds based on whether they charge entry, exit, or flat fees. More often than not, they look for a fund with no fees, that is, to receive shares at their net asset value (NAV). Unfortunately, what they don’t always realize is that even no-fee funds can charge a 12b-1 fee.

No-load funds may charge up to a 0.25% 12b-1 fee for “shareholder services”, while retaining a no-load designation in their prospectus. Loaded funds can charge up to a 1% 12b-1 fee, split up to 0.25% in shareholder services and up to 0.75% in advertising and administration costs.

Generally, it is best to invest in mutual funds with the lowest possible fees. This means taking into account the expense ratio and understanding which portion of the expense includes the 12b-1 fee. Savvy investors will look for a no-load mutual fund that does not charge a 12b-1 fee or charge well below 0.25%.

Does every mutual fund have a 12b-1 fee?

No, although many do. More and more funds have lowered fees in order to attract more investors. This is somewhat ironic, since, again, the original purpose of the fees was to help market the fund to new investors in order to increase assets under management. Many funds have since lowered fees to increase shareholder return on investment and build shareholder loyalty.

However, many mutual funds still have a 12b-1 fee. They withhold these fees for a variety of reasons (depending on the fund). While it is rare to see a fund with fees of 1% 12b-1, many funds range between 0.25% and 0.50%.

How to determine if a fund charges a 12b-1 fee

With these fees mixed with the fund’s total expense ratio, you’ll have to dig a little deeper. 12b-1 charges are not listed in a fund’s general financial metrics. Instead, you will need to go to his flyer to find them. Specifically, look in the “shareholder fees” section for “marketing and distribution” fees. Most funds don’t list 12b-1 fees by name and instead choose to list their practical expenses, such as “fund marketing”.

Another way to determine if a fund charges a fee is to determine if it is actively managed. Most actively managed funds use these fees as part of the administration of the funds. Automated funds do not need active management and therefore are not usually associated with a 12b-1.

Select funds taking fees into account

As most investors know, even a 1% fee can make a huge difference in returns over time, often thousands of dollars. Losing 12b-1 fee returns is not something that should happen in today’s accessible world of investing. Before you put any money in a fund, even if it is a no-load fund, be sure to research marketing and distribution costs. Small costs add up quickly!

To learn more about the different stock market regulations, guidelines and fees, sign up for U investment e-letter below. The more you know, the better prepared you will be when you start investing.

What is a 12b-1 tariff? Even 20 or 30 years ago, it was justifiable fees used to help market and grow the fund. Today, it is less and less relevant and more and more embarrassing for investors. Do your best to avoid fees and take special care when investing in mutual funds that claim to have low fees. It’s worth diving into the prospectus just to make sure the fees are as low as they claim to be and that you aren’t paying outdated fees that eat away at your ROI over time.





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