Those with investments in mutual funds may encounter what are called 12b-1 fees to help pay for various shareholder services and other fund expenses. But just what are these fees and how are they calculated?
The following breaks down 12b-1 fees in mutual funds.
Simply speaking, these are mutual funds that charge holders a 12b-1 fee. Such funds commonly use a portion of investment assets held to pay distribution and related costs.
According to SEC rule 12b-1, mutual funds may deduct an annual fee from net assets, part of which goes to brokers and other financial intermediaries to cover distribution and associated expenses.
These fees typically pay for some mutual funds’ distribution and marketing costs, as wells as shareholder services, and are commonly used for broker commissions. They are named for the U.S. Securities and Exchange Commission rule that permits mutual funds to use the fund’s assets for marketing costs.
Note that 12b-1 fees are different from fund management fees, used for operating costs such as hiring an investment team and portfolio manager.
Investors must pay such fees to mutual funds that charge them for distribution and various shareholder services.
Exact fees vary among funds but can legally run as high as 1% of the fund’s assets annually, with a 0.75% commissions charge and 0.25% for shareholder services.
For example, say an investor has shares in a fund earning a 9% annualized return over a 30-year period. If the investor does not contribute any extra money along the way, they will earn a 9% annualized return – 13 times their original investment.
However, if that investor must pay an additional 1% in annual costs, the return drops to 8%, resulting in only 10 times their original purchase.
The first thing an investor should do is determine whether they are paying such fees, which may be accomplished by a scan of the fund’s prospectus, which will list them.
There are passively managed funds including low-cost ETFs or index funds that allow investors to put capital in a broad cross-section of companies at low cost. Index funds such as Fidelity’s ZERO Large Cap Index (FNILX) have slashed expenses to zero.
Many investors of varying investments will encounter fees, such as management fees paid to one’s financial advisor, mutual fund transaction fees, fees for trade commissions, administrative 401(k) fees, and brokerage fees — such as for premium features including research, additional platforms, or subscriptions — which are not tax deductible.
Investors may also face an expense ratio – an annual fee charged by index funds, mutual funds, and exchange-traded funds. Some mutual funds also charge what is called a sales load, which is a commission paid to the salesperson or broker.
There are also various taxes involved with most investments, including capital gains taxes, taxes from dividends, interest-income taxes, and net-investment income taxes.
Alternative investments such as art and real estate are increasingly popular as investors steer away from stock market volatility and toward private-market asset classes. Such investments can offer steady secondary income with low correlation to public markets, in addition to protection against inflation. There may be expense ratios and other performance-based fees associated with alternatives.
Compared to other platforms, though, Yieldstreet — the leading platform for alternative investments — typically offers lower fees. To date, nearly $4 billion has been invested on the platform, which has the broadest selection of alternative asset classes of any platform. Plus, Yieldstreet’s offerings are highly vetted, which can mitigate risk.
Such investment opportunities serve to diversify one’s holdings, which can also decrease overall risk. In fact, diversification – intermingling one’s portfolio with a variety of asset classes – is a foundational pillar of long-term investment success.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
Investors in mutual funds must be aware of 12b-1 fees, which, unless they are minimized, can really add up. The first step is determining whether one’s fund charges them.
Remember, too, that while some fees are associated with alternatives, such fees can be relatively low, depending upon the platform chosen. Alternative assets also diversify portfolios, which can lessen overall risk and possibly improve returns.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.