12B-1 Fee

A 12b-1 fee pays the marketing expenses of a mutual fund. This fee operates like a secondary operating expense, deducted from the assets under management once a year. 12b-1 fees are essentially an ongoing commission that compensates financial planners, advisors, and brokers for referring customers. It also pays for future marketing from these sources.

12b-1 fees are difficult to completely avoid, but careful shopping can reduce them. This is important since 12b-1 reduces compounding annually, creating a long term drag on performance and returns. You should judge these fees in relation to the other expenses charged annually, adding 12b-1 fees to any other annual charges. Combining these two charges will display the total amount of expenses deducted annually each year from the fund’s assets under management. Be hostile to these charges, keeping in mind that they pay for marketing to new investors, and do literally nothing for existing investors while reducing your long term returns.