Study spotlights lingering fees at closed funds

The industry says closed funds need the so-called "12b-1" fees to defray costs of providing investment advice and fund information that existing investors need regardless of whether their fund has stopped accepting new clients.

The study's author, Srikant Dash, S&P's head of research and design, doesn't suggest a ban on fees at closed funds. But he argues the industry should consider voluntarily lowering them, since investors are left wondering why they continue paying fees even if a key reason the fees were established no longer applies when a fund closes.

At closed funds, "the continued existence of 12b-1 fees seems counterintuitive to investors" and creates "a visceral symbol of investor confusion," Dash noted.

While concluding it will take time to resolve ongoing regulatory questions about whether fees are excessive, "in the intervening period, investors may be well served if closed funds, particularly large funds that have efficiencies of scale, voluntarily lower 12b-1 fees," Dash wrote.

Managers typically close a fund to stabilize its size once it's reached a certain asset level, and is at risk of becoming unwieldy to manage if too much money flows in too quickly.

The fees are called 12b-1 in reference to a rule the Securities and Exchange Commission adopted when it approved the fees in 1980 to help the then-struggling industry recover from tough times in the 1970s.

Dash said regulators intended the fees be a temporary solution and help offset costs to win back investors who had pulled money out of funds.

But as the industry has grown, many funds billed as "no-load" funds have relied on the fees to cover a variety of fund expenses and make up for their lack of upfront sales commissions.

Dash's study found that $441.8 million of those fees, or about 3.5 percent of the total, go to closed funds--"a small portion of the overall pie," Dash said. To arrive at the figures, S&P examined closed funds that charge the fees--not all do--and had assets of more than $10 million as of last month.