A 12b-1 fee is a fee paid by a mutual fund to its management and/or distribution company. It is supposed to cover the mutual fund's promotion expenses (mainly commissions to selling agents as well as some advertising), but money is fungible, and goes to the management company's owners. Existing shareholders get no benefit from this expense which merely goes to compensate the agents who sell new investments.
Along with the expense ratio and loads, 12b-1 fees are among the charges paid by those investing in some mutual funds. The SEC requires that such charges be reported. You will find them in your fund prospectus and in the Morningstar.com information on each fund. 1/365th of the annual percentage of expense ratio and 12b-1 fee is deducted every day at closing from the fund's assets as the new net asset value is calculated. The fee is paid to the fund manager and then distributed as management decides.
12b-1 fees are used to promote sales of the fund. Some are rebated directly to the person or firm that recommended the mutual fund. Whereas loads are sales charges paid directly to the agent at the time of sale, 12b-1 fees accumulate continuously and reward the agent for keeping your funds invested in that fund.
Some 12b-1 fees pay for advertising and other promotional efforts. Some pay for training sessions to educate agents on the features and selling points of the product line. Often, those sessions take place at luxurious resorts. When your full-service broker tells you that he or she is traveling on business, assume that the broker is attending one of these sessions, paid for at your expense.
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