What is 12B-1 Fee?

As prevalent with any business enterprise that aims to make profits, mutual fund industries charge for the service they are providing. In the most ordinary form, these services encompass the marketing and distribution of the mutual fund. It is in generating the fee that 12B-1 Fee comes in.

Therefore, 12B-1 Fee is a fee charged by investors for annual marketing and distribution of mutual funds. The fee derived its name from a section of the Investment Company Act of 1940. It is considered as an operational expense and included in a fund expense ratio. The ratio is generally between a minimum of 0.25% and a maximum of 0.75% of a fund's net assets.

Uses of 12B-1 Fee

At the advent of mutual fund, the fee was brought to place because it was believed to be of huge advantage to the investors. This was because by marketing a mutual fund, the economy of scale could help increase the net assets of the fund and reduced expenses. However, with the value of mutual fund assets exceeding the $10 trillion mark, critics are beginning to question the justification of this fee.

Today, 12B-1 Fee is used for rewarding intermediaries when fund shares are sold. The conversion of the 12B -1 Fee into a commission paid to salespersons is believed to do nothing in enhancing the fund's performance.

In 2015, the SEC( Securities and Exchange Commission) started monitoring the fee in other to know if it is being adhered to and properly disclosed.

Breakdown of 12B-1 Fee

There are two distinct charges under the 12B-1 Fee:

Service Fee

Marketing and distribution Fee

The highest percentage of the service fee is 0.25% while the percentage for annual marketing and distribution fee is summed up as 0.75%.  The total 12B-1 Fee charged by a fund is reduced annually to 1%.

Uses of 12B-1 Fee

The fee charged on marketing and distribution is used for marketing and distributions, and to pay brokers who are in charge of selling the shares. The fee is also used to cover payment of advert and mailing of fund prospectus and literature to clients.

The service fee is used to fund the hiring of people who would help in distributing information when it is needed and also answer investor questions and inquiries.  Although, without the adoption of 12B-1 Fee, this fee would be charged.

Another category of the fee that can be charged outside the 12B-1 Fee is the "other expenses." This encompasses other expenses like legal fees, administrative services, accounting fee and many more.