Calling 12b-1 fees a wolf in sheep’s clothing, St. Louis Post-Dispatch columnist David Nicklaus doubts that the Securities and Exchange Commission will make good on its recent promise to curtail, possibly even eliminate, 12b-1 fees.

Most of the $11 billion or so that investors pay each year in 12b-1 fees is used to pay brokers via revenue-sharing agreements, rather than for marketing and advertising to raise a fund’s assets, and, therefore, bring lower fees through economies of scale.

When the SEC first permitted 12b-1 fees in 1980, the fund industry was losing assets due to a prolonged bear market throughout the 1970s. But since then, the industry has misused the fees for what, Niklaus said, are essentially “kickbacks.”

“This insidious fee lets a fund advertise itself as ‘no load’ while still using investors’ money to pay brokers for their sales efforts,” he notes. “Inside a 401(k) plan, it also lets the fund pay various middlemen with investors’ money.”

Noting that the SEC has repeatedly talked about doing away with 12b-1 fees over the years, Mercer Bullard, founder of Fund Democracy, thinks the tough talk will amount to very little, once again. “We haven’t seen any action yet, and I’m skeptical that there will be. The industry likes 12b-1 fees and wants to keep them the way they are.”

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