======12b-1_fees======
12b-1 fees are a sneaky, ongoing charge that many [[mutual fund]] companies deduct from your investment to pay for their marketing, advertising, and distribution costs. Named after a 1980 rule from the U.S. [[SEC]] (Securities and Exchange Commission), the original idea was that by advertising to attract more investors, the fund would grow larger. This growth would create [[economies of scale]], theoretically lowering the management costs for everyone. However, in practice, these fees often become a permanent drag on your returns, creating what [[Warren Buffett]] calls a "leaky bucket" that slowly drains your investment portfolio. Instead of helping existing shareholders, the fee primarily benefits the fund company and the brokers who sell the fund. For a value investor, who treats every dollar as a soldier in their army of capital, the 12b-1 fee is an enemy to be identified and avoided at all costs.
===== How Do These Fees Work? =====
Unlike a one-time purchase fee, the 12b-1 fee is an //annual// charge, deducted directly from the fund's assets. You won't get a bill for it; it's quietly nibbled away from your investment returns. This fee is a component of the fund's total [[expense ratio]], which is the yearly cost of owning the fund.
The amount you pay in 12b-1 fees often depends on the fund's [[share classes]]:
  * **Class A Shares:** Typically have a lower 12b-1 fee but often come with a [[front-end load]] (an upfront sales commission).
  * **Class B Shares:** (Now less common) Used to have higher 12b-1 fees and a [[contingent deferred sales charge]] (CDSC), a fee you pay if you sell your shares within a few years.
  * **Class C Shares:** Usually have the highest 12b-1 fee, often the maximum 1% allowed per year. They are designed for shorter-term holding periods and appeal to brokers because the fee provides them with a steady trail of commissions.
The takeaway is that this fee is often used to compensate the financial advisor or broker who sold you the fund.
===== The Value Investor's Verdict =====
[[Value investing]] is built on a foundation of discipline, patience, and, crucially, cost-consciousness. High fees are the arch-nemesis of [[compound growth]]. A 1% annual fee might not sound like much, but over decades, it can consume a massive portion of your potential returns.
The existence of 12b-1 fees also raises a significant red flag: a [[conflict of interest]]. When a broker recommends a fund with a hefty 12b-1 fee, are they recommending it because it's the best investment for you, or because it pays them a continuous commission? A true advisor should be on //your// side of the table.
Value investors actively seek to eliminate these unnecessary costs. Why pay a fund to market itself when there are thousands of excellent, low-cost alternatives that let you keep more of your own money?
===== How to Spot and Avoid 12b-1 Fees =====
Thankfully, these fees aren't impossible to find if you know where to look. Your best weapon is the fund's [[prospectus]]—a legal document that all funds must provide to investors.
==== Your Action Plan ====
  - **Step 1: Read the Prospectus.** Before you invest a single dollar, locate the "Fee and Expense Table" near the beginning of the prospectus. It’s usually one of the first things you'll see.
  - **Step 2: Find the Line Item.** Look for a line explicitly labeled "12b-1 Fee." If the number next to it is greater than 0%, you're paying it. The fee will also be bundled into the total "Annual Fund Operating Expenses" or "Expense Ratio."
  - **Step 3: Vote with Your Wallet.** The best 12b-1 fee is 0%. If a fund charges this fee, ask yourself if it's truly providing unique value that justifies this extra cost. In almost all cases, the answer is no.
  - **Step 4: Seek Superior Alternatives.** Focus your search on [[no-load funds]], which by definition must have a 12b-1 fee of 0.25% or less. Even better, look for low-cost [[index funds]] and [[ETFs]] (Exchange-Traded Funds), which often have no 12b-1 fees at all and boast some of the lowest expense ratios in the industry.