12b-1 Fee
Hidden mutual fund fee (0.25-1% annually) for marketing and distribution. Comes out of your returns. Avoid funds with high 12b-1 fees.
What You Need to Know
12b-1 fees are annual marketing and distribution charges buried in mutual fund expense ratios. Named after the SEC rule that allows them, these fees pay for advertising, broker commissions, and fund promotion.
Typical range: 0.25% to 1% annually, deducted from fund returns automatically. On a $100,000 investment, 0.75% 12b-1 fee costs $750 per year—every year.
These fees don't improve performance. They subsidize fund marketing to attract new investors, which doesn't benefit existing shareholders. Studies show funds with high 12b-1 fees underperform low-cost alternatives.
Identify 12b-1 fees in the fund prospectus under "Annual Fund Operating Expenses." Look for funds with 0% 12b-1 fees. Index funds typically have none. Actively managed funds often charge 0.25-1%.
Better approach: Choose funds with total expense ratios under 0.20% and zero 12b-1 fees. Vanguard, Fidelity, and Schwab index funds typically fit this criteria.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/12b-1-fees
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Related Terms in Investment
AUM (Assets Under Management)
Total market value of investments managed by an advisor or fund. Used to calculate 1% annual advisor fees—$500K AUM = $5K/year.
Alpha
Excess return above benchmark. Positive alpha = beat the market. Most actively managed funds have negative alpha after fees.
Bear Market
20%+ sustained market decline from recent peak. Characterized by fear, pessimism, and falling prices. Buying opportunity for long-term investors.
Beta
Volatility compared to market. Beta of 1.0 = moves with market. Beta of 1.5 = 50% more volatile. Measures risk, not return.
Bull Market
20%+ sustained market rise from recent low. Characterized by optimism, economic growth, and rising prices. Opposite of bear market.
Dividend Yield
Annual dividend payment divided by stock price. 3% yield on $100 stock = $3 yearly dividend. Measure of income return.