Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsMedium
A client is interested in investing in a mutual fund and asks about the various fees involved. Which of the following fees is typically deducted from the fund's assets and used to cover marketing and distribution expenses?
- AManagement fee
- B12b-1 fee
- CSales charge (Load)
- DRedemption fee
Show answer & explanationAnswer & explanation
Correct answer: B. 12b-1 fee
The 12b-1 fee is an annual fee deducted from a mutual fund's assets to cover marketing and distribution expenses, including compensation for brokers who sell the fund. The name comes from SEC Rule 12b-1.
Why the other options are wrong
- A. A management fee (or advisory fee) compensates the fund's investment adviser for managing the portfolio.
- C. A sales charge or load is paid when shares are purchased (front-end) or sold (back-end).
- D. A redemption fee is typically a short-term trading penalty paid directly to the fund when shares are sold.
12b-1 Fee
A 12b-1 fee is an annual marketing and distribution fee charged by a mutual fund, deducted directly from the fund's assets. It covers expenses like advertising, promotional literature, and compensation for brokers.
- Annual fee deducted from fund assets.
- Covers marketing and distribution expenses.
- Named after SEC Rule 12b-1.
- Can impact overall fund returns.
Memory trick: 12b-1: '1' fee for '2' kinds of 'b'usiness (brokers and buyers).