Mutual Fund Mortality, 12b‐1 Fees, and the Net Expense Ratio

Abstract

The Securities and Exchange Commission is currently reviewing Rule 12b-1, which governs how fund advisors may pay for the distribution of fund shares. We provide evidence that even after adjusting for economies of scale, funds with 12b-1 fees have higher expense ratios net of the 12b-1 fees than do funds without such fees. This finding suggests that 12b-1 fees are more than just a deadweight cost. We also demonstrate that 12b-1 fees are highest for funds that ultimately fail, that the proportion of funds with 12b-1 fees is increasing over time, and that the level of those fees is also increasing over time. 2006 The Southern Finance Association and the Southwestern Finance Association.

Mutual Fund Exit and Mutual Fund Fees

“…The number of funds (individual share classes within the multipleshare-class structure) increases across the sample period by about 50 percent (from 12,924 to 18,254), which reflects the increasing popularity among fund managers of the multiple-share-class structure. This is consistent with 12b-1 fee funds having a lower failure rate across a fixed period of time and with more new funds having 12b-1 fees, as detailed in Dukes, English, and Davis (2006). The median sizes of portfolios with 12b-1 fees and those without 12b-1 fees generally increase over this period, although there are periods of decrease and the difference is not consistently greater with either type.…”

“…In other words, the elasticity of substitution between 12b-1 fees and management fees may not be perfect. Second, following Dukes, English, and Davis (2006), we find that the presence of a 12b-1 fee may be indicative of other above-average charges by the fund manager. Finally, a primary goal of the SEC in the decision to allow 12b-1 fees was to increase the probability of survival for mutual funds with such fees (Freeman 1978).…”

“…It had long been believed that such fees, now known as Rule 12b-1 fees, exacerbated the conflict of interest created by the nature of external fund management. Subsequently, a large body of academic inquiry has concluded that 12b-1 fees are a deadweight cost to shareholders (Ferris and Chance 1987;McLeod and Malhotra 1994;Livingston and O'Neal 1998), and perhaps more than a deadweight cost (Dukes, English, and Davis 2006). 9 We do not focus on 12b-1 fees as a deadweight cost but rather on their impact on mutual fund exit method and timing.…”

Factores relacionados a las liquidaciones de ETFs durante 2008

“…The author finds that a family is less willing to liquidate a portfolio but more likely to merge a portfolio within the family if it offers more share classes. Dukes, English, and Davis (2006) find that Mutual Funds that fail or close have higher 12B-1 fees than mutual funds that do not close.…”

Should Indirect Brokerage Fees Be Capped? Lessons from Mutual Fund Marketing and Distribution Expenses

“…The empirical literature on 12b-1 fees is mainly concerned with showing that the expense is a deadweight cost (e.g., Ferris and Chance (1987), (1991), Freeman and Brown (2001), and Dukes, English, and Davis (2006)). In the work reviewed at the beginning of this paper (Bergstresser et al (2009), Christoffersen et al (2013), and Del Guercio and Reuters (2014)), attempts are being made to understand apparent misselling in mutual funds as a consequence of skewed broker incentives.…”