| Poor disclosure habits in the investment world | | | | fees they pay for their mutual funds, the SEC is |
| may mean that we see some changes. | | | | thinking about requiring better disclosure of the |
| Regulators Have been taking a closer look at the | | | | fee. |
| fees that investors pay. The fee that is getting a | | | | The organization has also considered eliminating |
| lot of attention now is known as a 12b-1 fee. | | | | the fee. While the fee was originally intended to |
| What is a 12b-1 fee? | | | | help with advertising and promoting mutual funds, |
| The Securities and Exchange Commission (SEC) | | | | very little of the fee is actually used for that |
| began allowing mutual funds to charge 12b-1 fees | | | | today. The majority of the 12b-1 fee is passed on |
| in 1980. The name comes from the SEC rule that | | | | to brokers who sell the funds. |
| authorizes the fee. | | | | There is a concern that if brokers are provided |
| The fee was originally assessed to cover | | | | with extra compensation for selling certain |
| expenses related to distributing mutual funds. This | | | | investment products, there is a stronger likelihood |
| includes the costs of marketing, advertising, and | | | | of a conflict of interest arising out of the broker's |
| promoting the mutual fund. The fee also covers | | | | recommendation. |
| the printing and mailing of fund prospectuses and | | | | Not an immediate red flag, but... |
| sales literature. In addition, brokers are often paid | | | | The fact that a fund has a 12b-1 fee is not an |
| a portion of their commission from the fund's | | | | immediate deal-breaker. Some funds carry these |
| 12b-1 fee. The limit on this portion of the fee is | | | | fees and still have low costs overall. However, in a |
| 0.75%. | | | | time where high returns are not the norm, larger |
| The fee may be collected for other shareholder | | | | fund expenses can severely impact the overall |
| services, such as making sure that | | | | gain in an investor's account. |
| representatives are available to respond to | | | | For example, a $10,000 investment earning an |
| investor questions or requests. There is a 0.25% | | | | average of 8% interest per year over 20 years |
| limit on this section of the fee. | | | | would grow to $46,609.57. If the fund carried a |
| Where can I find out if I am being charged a | | | | 1% 12b-1 fee that lowered the average interest |
| 12b-1 fee? | | | | rate to 7% per year, the gain would only grow to |
| According to Lipper, about two-thirds of mutual | | | | $38,696.84. The long term effect of the 12b-1 |
| funds assess a 12b-1 fee. Mutual fund companies | | | | fee is significant. |
| are required to list the 12b-1 fee in the fund's | | | | While investors should seek out advisors who are |
| prospectus. While it is listed separately, the 12b-1 | | | | trustworthy, it is still important for investors to |
| fee is also included in the fund's gross expense | | | | research the investments they carry to ensure |
| ratio. | | | | that the decisions made on their behalf truly are in |
| Protecting consumers | | | | their best interest. |
| Since so many consumers are unaware of the | | | | |