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Good Bye 12b-1 fee?
Old 07-22-2010, 04:46 PM   #1
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Good Bye 12b-1 fee?

Very few posters here pay a 12b-1 fee I'm guessing, but evidently there are still a boat-load of suckers, loons, imbeciles, idiots unsavvy investors who have not gotten the word yet, so what will MF companies think up to make up for the loss of $9,500,000,000 annually? Higher ER?

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The Securities and Exchange Commission voted unanimously Wednesday to propose limits on mutual fund distribution fees and provide more transparency for investors.
The mutual fund industry collected approximately $9.5 billion through 12b-1 fees last year, according to data from the Investment Company Institute.

The fees, which were developed in the late 1970s when funds were losing investor assets faster than they were attracting new assets, are used to offset a variety of expenses including advertising, broker's commissions and sales and marketing costs. These fees are equal to about 18% of all fund expenses, not counting sales charges, or about $2 for every $1,000 invested.
The SEC's proposal would protect investors by limiting fund sales charges (funds would be allowed to charge a “marketing and service” fee of up to 0.25 percent of a fund's assets per year), improve transparency of fees for investors, encourage retail price competition, and revise fund director oversight duties.
Goodbye 12b-1 Fees? - Financial Planning
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Old 07-23-2010, 10:07 AM   #2
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New and different share classes.
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Old 07-23-2010, 11:12 AM   #3
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How does this make anything more transparent? 12b-1 fees are on the prospectus. I can't see how this changes anything, they will just move the fees to some other line.

Probably some politician wants to claim 'we eliminated these greedy fees that the nasty Wall Street people were foisting upon you!'. When they did nothing of the sort.

-ERD50
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Old 07-24-2010, 11:40 AM   #4
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Originally Posted by ERD50 View Post
How does this make anything more transparent? 12b-1 fees are on the prospectus. I can't see how this changes anything, they will just move the fees to some other line.

Probably some politician wants to claim 'we eliminated these greedy fees that the nasty Wall Street people were foisting upon you!'. When they did nothing of the sort.

-ERD50
Unfortunately, I believe you are right. Lots of people are so enchanted with the belief that advisers can deliver extraordinary returns that they don't worry about expenses, regardless of how well you disclose them.
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Old 07-25-2010, 06:49 AM   #5
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A Distribution and Marketing fee sales fee .


Mutual Fund Fees and Expenses

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Distribution [and/or Service] (12b-1) Fees

This category identifies so-called "12b-1 fees," which are fees paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses."12b-1 fees" get their name from the SEC rule that authorizes a fund to pay them. The rule permits a fund to pay distribution fees out of fund assets only if the fund has adopted a plan (12b-1 plan) authorizing their payment. "Distribution fees" include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.The SEC does not limit the size of 12b-1 fees that funds may pay. But under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75 percent of a fund’s average net assets per year.
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Old 07-25-2010, 10:49 AM   #6
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Originally Posted by chinaco View Post
A Distribution and Marketing fee sales fee .
I guess I don't understand why an investor should care where the fees are going to, as long as they know what the total is.

If two funds have 1% fees, and Fund A has a .75% 12b-1 and Fund B has a .25% 12b-1 fee... what does that tell me? Maybe the higher fees bring in more clients and they get an economy of scale advantage?

-ERD50
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Old 07-25-2010, 11:46 AM   #7
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Originally Posted by ERD50 View Post
I guess I don't understand why an investor should care where the fees are going to, as long as they know what the total is.

If two funds have 1% fees, and Fund A has a .75% 12b-1 and Fund B has a .25% 12b-1 fee... what does that tell me? Maybe the higher fees bring in more clients and they get an economy of scale advantage?

-ERD50
Total cost is certainly one of my big concerns.

But that was not my point.

In many cases high 12(1b) is used to charge an ongoing sales load for certain share classes. At least that is part of the money... other parts are used for general marketing purposes to segment off money to support sales channels. Part of that money is often used by MF companies to pay commissions to brokers, dealers, banks, independent advisers, etc. In other words the investor essentially pays a yearly load.

Notice that fee is absent on VG funds.
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Old 07-25-2010, 12:22 PM   #8
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Originally Posted by chinaco View Post
Total cost is certainly one of my big concerns.

But that was not my point.

In many cases high 12(1b) is used to charge an ongoing sales load for certain share classes. At least that is part of the money... other parts are used for general marketing purposes to segment off money to support sales channels. Part of that money is often used by MF companies to pay commissions to brokers, dealers, banks, independent advisers, etc. In other words the investor essentially pays a yearly load.

Notice that fee is absent on VG funds.
The way I see loads is a Front End Load comes off at the time of purchase and a Back End Load comes off at the sale of the fund. If there is a fee of this type, I call it a load regardless of what the MF company says it is for. I see 12-1b as a fee.

My Vanguard EM fund (VEIEX) charges a 0.5% fee to buy in. This is an example of a front end load.

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Old 07-25-2010, 01:10 PM   #9
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Originally Posted by Free To Canoe View Post
The way I see loads is a Front End Load comes off at the time of purchase and a Back End Load comes off at the sale of the fund. If there is a fee of this type, I call it a load regardless of what the MF company says it is for. I see 12-1b as a fee.

My Vanguard EM fund (VEIEX) charges a 0.5% fee to buy in. This is an example of a front end load.

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It is not called a load... but it is often a class C share expense to replace the loss of the load form class A or class B shares.

  • Pay the commission upfront
  • Pay the commission on the back-end
  • Pay it along the way
Some of the 12(1b) money is used for other related marketing expenses.

12(b)-1 proposal may hurt investors, advisers contend - Investment News
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Old 07-25-2010, 02:10 PM   #10
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Originally Posted by chinaco View Post
Total cost is certainly one of my big concerns.

But that was not my point.

In many cases high 12(1b) is used to charge an ongoing sales load for certain share classes. .... In other words the investor essentially pays a yearly load.

Notice that fee is absent on VG funds.
I'm sorry, but I really am not getting your point then.

Vanguard VSTMX (for example) has a (nice, low) 0.18% expense ratio. Call it an expense, a fee, an annual load, or whatever you want. It costs money to offer /service a product, and make a profit, so we expect to pay something. What difference does it make if it falls into a slice called "12b-1" or "Expense Ratio"? As long as it is listed as part of total expense, why should I care as an investor?

As a taxpayer and investor, I would like to see the SEC focus on something more important. This just looks like a shell game to me - who cares, who is affected?

-ERD50
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Old 07-25-2010, 02:24 PM   #11
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All this worry from the investment industry about the small investor losing out on advice if these 12b-1 fees are dismantled presumes that the advice given out by so-called financial advisors is actually worthwhile. It seems that this is a dubious assumption, so one could say that restricting advice from financial advisors could actually be very helpful to small investors.
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Old 07-27-2010, 06:13 AM   #12
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All this worry from the investment industry about the small investor losing out on advice if these 12b-1 fees are dismantled presumes that the advice given out by so-called financial advisors is actually worthwhile. It seems that this is a dubious assumption, so one could say that restricting advice from financial advisors could actually be very helpful to small investors.
People will still seek advice from the financial community. The only difference is they will probably wind up paying commissions which probably will be more expensive.
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Old 07-27-2010, 07:18 AM   #13
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People will still seek advice from the financial community. The only difference is they will probably wind up paying commissions which probably will be more expensive.
Right - and while I agree with LOL that the advice provided is questionable, I'd say the SEC should attack that problem head-on, not through some attempt to choke it off by modulating the fee structure. It's just a shell game.

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Old 07-27-2010, 11:14 AM   #14
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Originally Posted by chinaco View Post
In many cases high 12(1b) is used to charge an ongoing sales load for certain share classes. At least that is part of the money... other parts are used for general marketing purposes to segment off money to support sales channels. Part of that money is often used by MF companies to pay commissions to brokers, dealers, banks, independent advisers, etc. In other words the investor essentially pays a yearly load.
True...........

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Notice that fee is absent on VG funds.
Why would they have it? They are not paying anyone to sell their funds.............
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Old 07-27-2010, 11:21 AM   #15
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Originally Posted by LOL! View Post
All this worry from the investment industry about the small investor losing out on advice if these 12b-1 fees are dismantled presumes that the advice given out by so-called financial advisors is actually worthwhile. It seems that this is a dubious assumption, so one could say that restricting advice from financial advisors could actually be very helpful to small investors.
Outside of this board, the Boglehead forum, and maybe the audience of Orman, Ramsey, and Clark Howard, how many folks know ANYTHING about investing? Not many....based on the folks I regularly talk too.........many of whom are quite successful.........

Bottom line, if 12b-1 goes away, the fund family will bury another expense in their prospectus, whereas now the 12b-1 is a seperate line item.

You can blame FAs all you want for selling MFs, but the industry is somewhat rigged by the MF families themselves. Maybe we could take away the .50 they skim before paying the FA's broker dealer to start, stuff like that..........called a "dealer concession", which literally translated means, "Our funds are so awesome you are lucky to sell them, so we need 50bp upfront to keep our awesome support staff"..............

I think I need to post a breakdown about FAs are paid NET on a MF sale. Probably nobody cares, but it would be eye-opening........
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