12b-1 fees are fees that mutual fund companies use to pay the brokers who sell their products.  The funny thing is not many people know about these fees and they certainly don’t know how much they are.  These fees are notoriously hidden so that the average investor has no idea what they are paying their broker.  Its actually a terribly flawed system based on deception and a lack of transparency.

There was an article today on www.financial-planning.com titled “Goodbye 12-b1 fees” which can be found HERE.  While I don’t think these fees will ever actually go away the Securities and Exchange Commission (SEC) is at least moving in the right direction.  Today the voted to propose limits on distribution fees and provide more transparency for investors“Despite paying billions of dollars, many investors do not understand what 12b-1 fees are, and it’s likely that some don’t even know that these fees are being deducted from their funds or who they are ultimately compensating,” said SEC Chairman Mary L. Schapiro, in a press release. “Our proposals would replace rule 12b-1 with new rules designed to enhance clarity, fairness and competition when investors buy mutual funds.”.

The amazing thing to me is that there actually people that take the opposite side of the argument and say that its bad for small investors.

Lynch said the fundamental problem is the way the business is built today. 12b-1 fees have become the difference between profit and loss for many firms, Lynch explained. “Smaller firms and advisors have come to count on 12b-1 fees as a material revenue source and they have built their service model, marketing plan, and the minimum assets under management required based on the 12b-1 model,” he said.

Lynch believes the impact of capping or eliminating fees will be that advisors will start to move upmarket to larger clients who they can charge larger fees and lower-end clients will be moved to a self-service approach: “Just like you pay someone to do your taxes I think the industry will move to a fee-for-service model where you don’t pay on an ongoing basis, but imbed fees within products.”

Completely ridiculous if you ask me!  Paying brokers to sell your funds and not being honest and open about the fees to investors is just unfair.  Unfortunately its the small investors who are most hurt by these practices.  Advice does not hinge around 12-b1 fees but instead around funds that are actually strong performers.  What a novel idea!  I encourage people to avoid working with any advisors who get paid 12-b1 fees.  If you are unsure, just ask! There are much better options out there…

Popularity: 5% [?]