How Much Do Fund Companies Pay in Revenue Sharing?

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    Ethics matter

    How much money do 12b-1 fees take from shareholders?

    An article, American Funds Hit With 12b-1 Lawsuit  (The Street.com, July 2, 2008, by Kevin Burke) reported  that American Funds in 2007 paid out over $2 billion in 12b-1 fees  in 2007.

    This data came to light as an investor in the $122 billion American Funds EuroPacific Growth Fund sued the fund family and its parent for alleged misuse of 12b-1 fees.

    The suit challenges a longstanding industry compensation structure crucial to fund companies’ getting their funds distributed through different broker-dealers and ensuring that brokers who sell the funds get paid.

    Rachelle Korland of Ohio filed a complaint in the Central District Court of California against Capital Research and Management Company and American Funds Distributor on behalf of all shareholders of the fund. The complaint accuses American Funds of violating its fiduciary duty under Section 36(b) of the Investment Company Act of 1940 by unlawfully financing activities that were not “primarily intended” to result in the sale of fund shares.

    A spokeswoman for American Funds did not return phone calls seeking comment as of press time.

    Attorneys for the plaintiff argue that American Funds’ 12b-1 fees were used to pay for ongoing shareholder services after the initial sale of fund shares, thereby making them “excessive and disproportionate.”

    In 2007, over $2 billion in 12b-1 fees were paid by American Funds’ shareholders alone, according to the complaint.

    The suit is seeking, among other things, a declaration that American Funds’ 12b-1 fees are “unreasonable, excessive and unlawful,” a removal of the 12b-1 fee adopted by the fund, removal of the fund’s independent trustees, undetermined compensatory damages in favor of the fund, and removal of American Funds Distributor and Capital Research as the fund’s distributor and advisor.

    Revenue sharing is a major reason why American Funds is consistently ranked as a leading fund family among investment reps.  As a reminder, 12b-1 fees are shareholder money which is used to fund mutual fund marketing departments and compensate brokers for selling a specific fund family.

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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