NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client is evaluating two actively managed mutual funds. Fund A has an expense ratio of 1.20% and a 12b-1 fee of 0.50%. Fund B has an expense ratio of 0.90% and no 12b-1 fee. Assuming all other factors are equal, which fund would have lower annual expenses for the client, and by how much?
- AFund A, by 0.20%
- BFund B, by 0.20%
- CFund B, by 0.80%
- DFund A, by 0.30%
Show answer & explanationAnswer & explanation
Correct answer: B. Fund B, by 0.20%
Fund A's total annual expenses are 1.20% (expense ratio) + 0.50% (12b-1 fee) = 1.70%. Fund B's total annual expenses are 0.90% (expense ratio) + 0% (12b-1 fee) = 0.90%. Therefore, Fund B has lower expenses by 1.70% - 0.90% = 0.80%.
Why the other options are wrong
- A. Incorrect calculation; Fund A has higher expenses.
- C. Incorrect calculation.
- D. Incorrect calculation.
Mutual Fund Total Expenses
The combined annual costs associated with owning a mutual fund, typically including the expense ratio (management fees, administrative costs) and any 12b-1 fees (marketing, distribution).
- Expense ratio covers operating costs and management fees.
- 12b-1 fees cover marketing and distribution costs.
- Lower expenses generally lead to better net returns over time.
Memory trick: Fund costs: Expense Ratio + 12b-1, always check the total.