A mutual fund’s marketing and distribution fees are classified under 12B-1 fees. These fees include the costs of advertising and promoting the fund, as well as the printing and mailing costs for the fund's prospectus. It also includes fees paid to brokers who sell shares in the fund. The 12B-1 fees can also include the cost of having someone available to answer questions regarding the fund. This is referred to as the shareholder service fee.
A mutual fund must have a 12B-1 plan in place before it can charge shareholders marketing and distribution fees. The Securities and Exchange Commission (SEC) does not require mutual funds to have a 12B-1 plan to charge a shareholder services fee. The Financial Industry Regulatory Authority (FINRA) imposes a maximum percentage a mutual fund may charge shareholders for 12B-1 fees is one percent, which is 0.75 percent for marketing and distribution fees and 0.25 percent for shareholder service fees.
Mutual Fund Company Calculations
Mutual fund companies base the 12B-1 fee calculations on the fund’s average annual net assets. To calculate the net assets of a mutual fund, subtract the fund’s current liabilities from the market value of its holdings. A fund’s current liabilities include fund management fees and broker commissions. A mutual fund’s holdings are the securities and investment instruments in which the mutual fund owns shares. The SEC requires that all mutual fund companies report net assets, or net asset value, once a day.
Example Mutual Fund Company Calculations
Since the fund’s asset value experiences daily movement, FINRA requires that mutual funds use the average annual net assets. In this example, assume the average annual net assets for a mutual fund are $10 million. They charge their shareholders a 12B-1 fee of .20. The total amount they charge to all shareholders of the fund annually is $10 million times .20, which equals $20,000. FINRA limits these charges to a maximum of one percent, which means the fund can charge their shareholders up to $100,000 ($10 million times 1 percent) for 12B-1 fees.
Individual Shareholder Calculations
To perform a simple calculation to discover how much you are paying toward 12-B1 fees, multiply your initial investment by the amount of the 12B-1 fees. For example, assume the mutual funds fees are a front-end sales load of 5.75 percent, and 12B-1 fees of .23 percent. Your initial investment is the amount of money you have to invest, minus the front-end sales load. The front-end sales load is the commission you pay to a broker when you buy the fund. In this example, you have $1,000 to invest. Your broker takes the fee right off the top and charges you $1,000 times 5.75 percent, which equals $57.50. This means your initial investment is $942.50. ACME charges you 12B-1 fees on $942.50. You then do the math: $942.50 times .23 equals $2.17.