If you own some mutual funds, chances are you are paying a hefty marketing price. This marketing expense is called the 12b-1 fee. The annual fee not only reduces your earnings, but it may also jeopardizes whether or not your investment advice is unbiased or self-serving.

Initially adopted by the SEC in 1980 to stimulate growth for struggling mutual funds, the SEC 12b-1 regulation allows fund managers to pay up to 1% out of fund assets for distribution costs such as advertising, sales literature, literature distribution and, most importantly, compensation to the brokers who sell them to you.

The logic behind such advertising fees was to provide a temporary means for fledgling mutual funds to quickly increase assets through promotion and advertising. By attracting new investors, mutual funds could achieve higher levels of operating efficiency, thereby reducing overhead and passing on savings to the shareholders. Now, over thirty-five years later, it seems 12b-1 fees are costing shareholders more than ever and are here to stay.

The Investment Company Institute, a mutual fund company advocacy group, reported that investors paid more than 10 billion dollars in 12b-1 fees in 2004, up from a few million dollars in the early 1980’s. The same report estimated 40% of the 12b-1 fees go to line the pockets of investment brokers who sell the funds to their clients and another 52% pay brokers for the ongoing shareholder services such as toll-free phone lines for their clients. In some cases, 12b-1 promotion fees continue to siphon off mutual fund assets even after the funds are closed to new investors.

It is no surprise that brokers have lobbied the SEC to maintain the fees, claiming they receive up to half their gross salary from 12b-1 fees. The implication creates a conflict of interest between you and your financial advisor, who may be marketing only mutual funds with commissions and 12b-1 fees.

With more than 17,000 different mutual funds, navigating the legalese of fund disclosures and fee schedules to determine what you are really paying in fees is a daunting task. We use Morningstar’s Principia Pro software for our mutual fund information. When we search its mutual fund database we learned that 34% charge no 12b-1 fee. An additional 22% charge a fee less than or equal to 0.25%, allowing the funds to still qualify as no-load mutual funds. The remaining 44% of loaded funds charge more than 0.25% with the majority charging the 1% maximum allowable by law.

Salesmen whose livelihoods depend on 12b-1 fees provide a vivid example of the difference between those who have a legal obligation as a fiduciary to sit on your side of the table and seek your best interests and those who have no such obligation and sell a company’s financial product. The latter, if being honest, must disclose, “Our interests may not always be the same as yours.”

Many investors are hesitant to seek the advice of a fee-only financial planner, asking “Why pay someone a fee every year?” But most of them are paying 12b-1 fees every year and forfeiting access to professional asset management and comprehensive financial planning. Any fee can be earned if it brings you more value than cost, but 12b-1 fees are not those kinds of fees. Studies have shown that those funds with the highest 12b-1 fees have the lowest returns.

One brokerage firm a few years ago offered a 12b-1 rebate program in which they refund up to 50% of your 12b-1 fees. This may sound like a good deal, but this is exactly the wrong message to send. Why would investors want to purchase investments with high fees simply because they will refund fifty cents on every dollar they charge you for marketing?

To find out the fees charged by your mutual fund, go to: www.morningstar.com and in the quotes box in the upper left portion of the screen type in your 5 letter mutual fund symbol and tap the ENTER key. Then, in the left column, click on “Fees & Expenses.” If after seeing your losses to 12b-1 fees you are interested in finding a fiduciary who will sit on your side of the table, visit the National Association of Personal Financial Advisors website at www.napfa.org to find an advisor in your area.

Photo used under Flickr Creative Commons license. The original version of this article was published November 28, 2005.