We recently discussed different ways that investors can own mutual fund shares. Most mutual funds have A shares, B share, and C shares. We noted that B shares and C shares usually include 12b-1 fees. Many investors don’t know what these fees are or do but are confused by them. Tom takes a moment to briefly explain 12b-1 fees in this week’s video.

12b-1 fees were originally allowed by the Investment Company Act of 1940. The thought behind allowing them was that if mutual funds were able to advertise, they would be able to increase their assets. This would hypothetically lower the fund’s expenses. In 1980, mutual funds realized the rule allowed them to use 12b-1 fees to pay brokers as compensation for selling their mutual funds. Not exactly advertising.

In most Class B shares 12b-1 fees are around .25% per year. In your average Class C shares that fee is closer to 1% per year. If that doesn’t seem like much to you consider this: In 2009, mutual funds paid $9.5 billion in 12b-1 fees.

Investors should always know how their money is invested. If they don’t know, they should ask their investment advisor immediately.

You can learn more about 12b-1 fees by visiting the following link: http://www.morganlewis.com/pubs/IMFYI_MutualFundDistributionFees_01sept10.pdf

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