12b-1 fees provide no benefit to fund shareholders, SEC
economist Lori Walsh
concluded in a study
submitted days before the May 10 deadline for the SEC's comment period on 12b-1 fees.
Shareholders investing in funds charging 12b-1 fees neither receive higher returns (in the form of lower volatility), nor are their fees offset through lower average expenses, concluded Walsh.
"Fund shareholders are paying the costs to grow the fund, while the fund adviser is the primary beneficiary of the fund's growth," wrote Walsh.
Although Walsh found that most funds can grow to the point where it is "theoretically possible" to offset 12b-1 fees, she notes that practically, the outcome is possible for only a small subset of funds and that the funds do not achieve the economies of scale within a typical investor's holding period.
Comparing 12b-1 funds and non-12b-1 funds, Walsh finds that it takes the average 12b-1 equity fund 62 years to achieve scale economies so that its expense ratio is on par with the average non-12b-1 fund ratio.
"12b-1 funds do experience higher annual net inflows than comparable non-12b-1 funds. However, it would take decades of sustained growth at typical 12b-1 fund growth rates for a fund to be able to achieve sufficient scale economies to offset 12b-1 fees" wrote Walsh.
Walsh also pointed out that 12b-1 fees prevent investors from choosing appropriate share classes because the fees are never fully revealed by fund firms. Another downside is that large investors may subsidize small investors because all investors pay the same percentage, although small investors' accounts may cost more than large accounts as a percent of account size.
Walsh also challenged the idea that funds with 12b-1 fees generate higher returns through reduced volatility or reduced net redemptions, concluding that volatility may actually be higher for 12b-1 funds.
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