Morningstar's John Rekenthaler said the 12b-1 fee is a turkey that deserves to be slaughtered. The fee was passed in 1980 after politicians pitched that find companies would charge shareholders less if shareholders paid more to end companies. This circular logic did not evade Rekenthaler, who thinks the fee has made the system more complicated by adding multiple share classes.

Unsurprisingly the fund companies used the fees to boost profits instead of using the fees for operating expenses. He cites a study by SEC economist Lori Walsh:

The paper finds that while funds with 12b-1 plans do, in fact, grow faster than funds without them, shareholders are not obtaining benefits in the form of lower average expenses or lower flow volatility. Fund shareholders are paying the costs to grow the fund, while the fund adviser is the primary beneficiary of the fund's growth.

In addition to disadvantaging the investor and making fees less clear, collateral damage is done to the industry. Because financial advisory firms have to calculate which share class would suit a certain investor, they increase the potential for costly compliance and legal risks.

To read more, click here. 

Edited by: Casey Quinlan


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