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.
Chuck:
Another $11.8 trillion in assets and this mutual fund thing may just catch on. Until then, the American taxpayer better subsidize the marketing of this promising little business with 12b-1 fees. Those original Ansel Adams pieces all over the American Funds headquarters don’t pay for themselves.
Not sure if shareholders even know about the Ansel Adams art collection in American Funds corporate headquarters, but if lower fees can put a few dollars in their individiual accounts, they would certainly opt for that benefit rather than the artwork. Also, the mutual fund industry certainly delivers clear benefits, but they sometimes forget they are operating by using other people assets, and that shareholders often deserve more for the fees they are paying. Also, American Funds should create a chart showing how many times they have reduced individual fund expense ratios over the years compared to their growth in asset size.
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