The 12b-1 fee fails at everything it does.
It's no secret that the mutual fund 12b-1 fee failed its original promise. The fee was pitched as a cost savings: If mutual fund shareholders paid more to fund companies, fund companies would charge shareholders less. Scratching your head? Good reaction. Unfortunately, fund-industry lobbyists were skilled at removing people's hands from their heads, and the rule was passed in 1980. Sure enough, it led to fund expenses rising rather than falling.
It turned out that for-profit fund companies sought increased profits. Who could have guessed? So, if the addition of a 12b-1 fee enabled a fund to gather more assets and thus increase its revenues, the fund did not use most of those new revenues to reduce operating costs for existing shareholders by passing along its economy of scale. Instead, it used most of its new revenues to boost fund-company profits. That anybody was surprised is surprising.
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