Attributes and Implications of Mutual Fund Revenue Sharing and 'Defensive' 12b-1 Fees

Haslem, John A. "Attributes and Implications of Mutual Fund Revenue Sharing and 'Defensive’ 12b-1 Fees.” Journal of Wealth Management, Vol. 22, No. 2 (Winter 2019), pp. 134-139.

Posted: 12 May 2020

See all articles by John A. Haslem

John A. Haslem

University of Maryland - Robert H. Smith School of Business

Date Written: September 29, 2019

Abstract

Revenue sharing rewards brokers for high and higher sales and/or asset holdings of fund shares, and further defrays current and higher broker costs of advertising and promotion, ongoing broker servicing of fund investor accounts, and educational support. It results in higher broker sales and increases fund assets under management (higher inflows) and profits; higher broker sales of fund shares increases sales concessions and distribution fees. Higher assets under management in turn increase trade size and broker commissions, trade execution, and profits. Revenue sharing usually brings direct payments from fund advisor “profits,” but may be bundled in fund management fees paid to advisors who write the checks. The use of management fees to pay revenue sharing increases fund fee size and fund outflows. Brokers rebate “fall-out benefits” from “excess” revenue sharing payments directly to fund advisors, which motivates higher revenue sharing payments and higher broker profits. Revenue sharing payments via management fees reduce current fund NAVs and shareholder returns. Most retail investors are unaware of the existence, nature, and costs of revenue sharing payments. Revenue sharing is agency conflicted with shareholder interests and returns.

JEL Classification: G

Suggested Citation

Haslem, John A., Attributes and Implications of Mutual Fund Revenue Sharing and 'Defensive' 12b-1 Fees (September 29, 2019). Haslem, John A. "Attributes and Implications of Mutual Fund Revenue Sharing and 'Defensive’ 12b-1 Fees.” Journal of Wealth Management, Vol. 22, No. 2 (Winter 2019), pp. 134-139., Available at SSRN: https://ssrn.com/abstract=3563844

John A. Haslem (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742
United States
202-387 2025 (Phone)

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