SKARBECK: Changes on horizon for mutual fund fees

Back to TopCommentsE-mailPrintBookmark and Share

Ken Skarbeck InvestingBehind the scenes, a major upheaval is under way in the mutual fund industry.

The U.S. Securities and Exchange Commission is proposing significant changes to the structure of the annual marketing or distribution fee on mutual funds known as a 12(b)-1 fee. These changes will affect the compensation of brokers and advisers who sell mutual funds.

This annual fee can cost investors anywhere from 0.25 percent to 1 percent, although not all mutual funds charge them.

Fund investors are probably at best vaguely aware of these fees, which were originally allowed by the SEC in 1980. At that time, mutual funds were losing investor assets and the 12(b)-1 fee was devised to help funds pay for marketing and distribution expenses to attract new assets. The total fees collected amounted to just a few million dollars in 1980.

In a display of the law of unintended consequences, however, that amount climbed rapidly. In 2009, investors paid $9.5 billion in 12(b)-1 fees.

SEC Chairman Mary Shapiro in a July news release said, “Despite paying billions of dollars, many investors do not understand what 12(b)-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.”

The SEC proposal has four goals:

1. Protect investors by limiting fund sales charges by capping any ongoing sales charges at the highest fee or front-end load that the fund charges. In other words, if a fund charges a maximum 4-percent front-end sales charge, another class of fund shares could not charge more than a cumulative 4 percent over time to any fund investor.

2. Improve transparency of fees for investors. Funds would have to disclose “ongoing sales charges” and transaction confirmations would have to describe the total sales charges to an investor.

3. Encourage retail price competition. Brokerage firms could establish their own fee arrangements with a fund, thereby creating competition among brokers in hopes of lowering total fees.

4. Revise fund director oversight duties. Instead of directors annually reapproving sales charges, the proposed SEC plan would set limits on fund fees, eliminating the need for directors to reapprove them.

Incidentally, getting elected as a director to a mutual fund has to be one of the best gigs on the planet, even better then the perennial “backup NFL quarterback.” Mutual fund directors at the larger fund complexes earn several hundreds of thousands of dollars a year “representing the interests” of fund investors.

The SEC, which has tried to tackle 12(b)-1 fees before but backed down, expects to enact these changes soon after the 90-day comment period on the proposal ends next month. Brokers and advisers who sell mutual funds are upset about Shapiro’s tinkering with their compensation and are quick to point to the revelation that she received $9 million when she left FINRA, the private self-regulatory organization that regulates the securities industry, to head the SEC.

It’s worth noting that some advisers have moved away from funds that charge 12(b)-1 fees, using institutional class funds that generally have lower fees. Exchange-traded funds have also gained a following among advisers.•


Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.


Post a comment to this story

We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
You are legally responsible for what you post and your anonymity is not guaranteed.
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Follow on TwitterFollow IBJ on Facebook:
Follow on TwitterFollow IBJ's Tweets on these topics:
Subscribe to IBJ
  1. Of what value is selling alcoholic beverages to State Fair patrons when there are many families with children attending. Is this the message we want to give children attending and participating in the Fair, another venue with alooholic consumption onsite. Is this to promote beer and wine production in the state which are great for the breweries and wineries, but where does this end up 10-15 years from now, lots more drinkers for the alcoholic contents. If these drinks are so important, why not remove the alcohol content and the flavor and drink itself similar to soft drinks would be the novelty, not the alcoholic content and its affects on the drinker. There is no social or material benefit from drinking alcoholic beverages, mostly people want to get slightly or highly drunk.

  2. I did;nt know anyone in Indiana could count- WHY did they NOT SAY just HOW this would be enforced? Because it WON;T! NOW- with that said- BIG BROTHER is ALIVE in this Article-why take any comment if it won't appease YOU PEOPLE- that's NOT American- with EVERYTHING you indicated is NOT said-I can see WHY it say's o Comments- YOU are COMMIES- BIG BROTHER and most likely- voted for Obama!

  3. In Europe there are schools for hairdressing but you don't get a license afterwards but you are required to assist in turkey and Italy its 7 years in japan it's 10 years England 2 so these people who assist know how to do hair their not just anybody and if your an owner and you hire someone with no experience then ur an idiot I've known stylist from different countries with no license but they are professional clean and safe they have no license but they have experience a license doesn't mean anything look at all the bad hairdressers in the world that have fried peoples hair okay but they have a license doesn't make them a professional at their job I think they should get rid of it because stateboard robs stylist and owners and they fine you for the dumbest f***ing things oh ur license isn't displayed 100$ oh ur wearing open toe shoes fine, oh there's ONE HAIR IN UR BRUSH that's a fine it's like really? So I think they need to go or ease up on their regulations because their too strict

  4. Exciting times in Carmel.

  5. Twenty years ago when we moved to Indy I was a stay at home mom and knew not very many people.WIBC was my family and friends for the most part. It was informative, civil, and humerous with Dave the KING. Terri, Jeff, Stever, Big Joe, Matt, Pat and Crumie. I loved them all, and they seemed to love each other. I didn't mind Greg Garrison, but I was not a Rush fan. NOW I can't stand Chicks and all their giggly opinions. Tony Katz is to abrasive that early in the morning(or really any time). I will tune in on Saturday morning for the usual fun and priceless information from Pat and Crumie, mornings it will be 90.1