12b-1 Fees Gone Wild

May 11, 2007

John Waggoner at USA Today looks at the wacky past and current state of affairs of the oddly-named mutual fund 12b-1 fee.

The American Funds' Growth Fund of America A, for example, which is the nation's largest fund, weighing in at $85 billion in assets, doesn't exactly need to jack up its marketing efforts to attract more assets. Yet that fund charges a 12b-1 fee of 0.25% — nearly as much as its other fees combined. The American Funds says the fee goes to servicing accounts.

The 12b-1 fee is also at the heart of the bewildering multishare class system we have today. In many cases, 12b-1 fees have morphed into a way to indirectly pay a broker's commission.

Funds discovered that people don't like to pay commissions on mutual funds. So they used the 12b-1 fee to make the brokerage charges more palatable and less transparent.

A particular mutual fund might have three share classes. Each share class represents the same portfolio but has a different expense structure."

For those looking for a brief history into the nature and causes of mutual fund 12b-1 Fees, it’s a must read.

An interesting factoid from the article: the entire mutual fund business had less money in total assets in 1980 than in 1972. Now THAT’S a rough market environment. No wonder everybody was buying gold – they plum gave up on stocks ( gold is still down from 1980 and stocks are up well over 20-fold). Today total mutual fund assets are much higher than the market peak of 2000 - even though the S&P 500 just broke its old record set in 2000. Fund investors are just more forgiving these days.

More startling, American Funds Growth Fund Of America Class A (AGTHX) alone has more money in it today than the entire fund business was managing back in 1980.

LINK

0 COMMENTS: POST A COMMENT