Final answer:
A 12b-1 fee is an annual fee associated with a mutual fund for advertising, commissions, and distribution, approved by the fund's board of directors. This fee is part of the fund's expense ratio and reduces the return to investors. It is considered a controversial fee and is disclosed to investors in the fund's prospectus.
Step-by-step explanation:
The 12b-1 fee is an annual marketing or distribution fee on a mutual fund. The fee gets its name from the SEC rule that permits it. The approval to put out a 12b-1 fee is typically made by a mutual fund's board of directors. It is part of the fund's overall expense ratio and is disclosed to investors. It is supposed to assist in covering the costs of marketing and selling the fund, including advertising and commissions for brokers, as well as for services like shareholder mailings and distribution of prospectuses.
This fee is controversial because it is deducted from the fund's assets, and thus it diminishes the return to investors. Once approved by the fund's board, shareholders in the fund indirectly pay this fee as it is subtracted from the fund's assets. Some believe this fee does not add value commensurate with its cost. Prospective investors should always review a mutual fund's prospectus to understand all the fees associated with the fund before investing.