What is the 12B-1 Plan?
Mutual Funds is a coalescence of multiple assets with a predetermined objective to fulfil. The funds are managed by experienced finance professionals called fund managers. Overseeing any fund requires sound knowledge about the market, a good eye for detail, research skills, and a few other advanced qualities. Now, there’s a cost involved in actively carrying out all the managing activities concerning the fund. The list of expenses includes advertising, marketing and distribution, fund manager’s commission, etc. The process of distributing the funds is found in the 12B-1 plan. Read further to know more related to the subject
What is a 12B-1 Plan?
The 12B-1 plan exhibits the blueprint drafted by the mutual fund companies that state the distribution of funds through brokers. This plan acts as a map to communicate with the distributors and intermediaries/brokers, helping them to build a partnership that eventually leads to the sale of the fund.
The two factors that propel the 12B-1 plan forward are sales commission and distribution expenses. It facilitates the whole process from connecting the distributors with the intermediaries to the sale of mutual fund shares. Upon fulfilling the sale transaction, the intermediary receives a sales commission.
This is a reward to compensate for transacting the mutual fund sale. Additionally, the fund gets full popularity and effortless promotions by selling it via an individual broking firm.
The 12B-1 plan also manifests the 12B-1 fees that are required to pay towards the mutual fund marketing and distribution aspects. There are three types of mutual fund share classes - Class A, Class B, & Class C. The fee and expenses levied on the fund differs from one share class to another. The Class A shares carry a front-end load upon buying the securities. The load ranges anywhere between 2% to 5.75%.
The Class B shares carry only a back-end load upon selling the securities. The higher the holding period of the fund, the lesser would be the load on your sale. After a stage, the load value becomes zero as well. The Class C shares carry a level load of 1% on the fund. If the securities are sold within a year, the investors need to pay a contingent deferred sales charge. The Class B and Class C shares have higher expense ratios compared to the Class A shares.
All these shares are promoted, marketed, and brought into the market by the intermediaries backed up by the distributors as a channel. The 12B-1 plan expenses are those charges paid to both intermediaries and distributors for facilitating the sale of the mutual fund shares. These charges also include the marketing and distribution aspects of the fund. The regulatory authority has set the 12B-1 fee limit to not more than 1% of the net assets of the fund annually. However, the 12B-1 fees fall in the bracket range of between 0.25% to 1%.
Disclosure of 12B-1 Plan
Mutual Fund companies should display the sales load, and any other expenses transparently to the investors. The full disclosure keeps the investors’ indecision on the funds at bay. All the information related to the fund is revealed in the fund’s prospectus. The fund manager or the respective stockbroker or intermediary shares the prospectus via mail to all the investors. Investors can collect the prospectus offline at the broking company as well.
The 12B-1 plan is documented by the mutual fund companies mentioning the necessary details of the fund. Any structural changes in the 12B-1 plan should be ratified by the board of directors of the respective fund. Once the modifications are made in the 12B-1 plan, the same has to be conveyed in the fund’s prospectus to avoid discrepancies.