Per the SEC
- This category identifies so-called "12b-1 fees," which are fees paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses. "12b-1 fees" get their name from the SEC rule that authorizes a fund to pay them.
- "Distribution fees" include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.
- The SEC does not limit the size of 12b-1 fees that funds may pay. But under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75 percent of a fund’s average net assets per year.
However after further investigation it seems many funds are using it for the other reason - "compensating brokers.... who sell fund shares."
Specific to most funds (and myself) is the Russian mafia known as the Fidelity and Schwab fund supermarkets. Like Ebay they own the marketplace - you have to go to Ebay to sell stuff since that is where the buyers are. Same for a mutual fund - tons of investors now reside on their supermarkets... I get emails each week asking why I am not listing there. In many funds 80%ish of their asset flows come from those supermarkets - especially if you are a no load and not the type of fund family huge enough to be in 401k plans.
These 2 firms charge an arm and a leg (and parts of the torso) - essentially for every dollar invested via their supermarket they take 0.4% of the expense ratio for themselves. Aside from Paypal this could be the best business model in the world. So as a small stand alone fund I was resigned to the fact I could not get on the platforms until I was much larger since I can't afford to give away such a huge portion of my revenue. But that's where the 12b-1 fee can help - potentially. While in theory it can go up to 0.75% that's an outrageous level, and most 12b-1 fees seem to be 0.25%. Hence you can use the 12b-1 to help defray the costs to the Russian mafia and then be responsible for 0.15% (rather than the full 0.4%) out of pocket.
So at this time I am doing more research on the 'up front costs' (aside from the ongoing 0.4%
There is an excellent piece from 2004 at Forbes if interested in the topic...