Are 12b-1 fees an anachronism that should be done away with? The SEC seems to be leaning that way and I tend to agree with them on the issue:
The top U.S. securities regulator pushed on Thursday to reform mutual fund fees that traditionally used to stimulate fund growth and help cut shareholder expenses.
The so-called “12b-1” fees, charged by mutual funds for marketing and fund promotion, have been criticized for no longer serving their original purpose.
“When it comes to these fees, there is a need for more fundamental change than merely disclosure reforms and a name change,” Securities and Exchange Commission Chairman Mary Schapiro said at a consumer conference.
These particular fees, which are billed against the mutual fund holders’ investment, were originally instituted to cover marketing expenses in the early 80’s when redemptions were killing the industry. Critics now claim that the fund families are starting to use the money from these fees to cover administrative costs, which is against the spirit in which they were adopted.
My personal opinion is that mutual fund companies may be better off without the fees anyway, as this part of the investors’ cost structure makes open end funds less competitive versus ETFs anyway.