There are two basic categories describing how investment managers earn their money. Unfortunately, the terms sound very similar, as if they were designed to cause confusion. The categories: fee-based and fee-only.
Fee-only managers get paid directly by you. Their compensation comes (like the name says) only from the fees they charge their clients. Fee-based investors can charge fees also, but they can earn commissions on top of that.
Fee-only managers might be more expensive to you, since the only way they earn a living is by charging you money. However, their advice comes without any conflict of interest. They don't earn a commission from selling you any particular fund, so if they suggest a fund, you can assume they really think it's the best option for you.
Fee-based managers are subsidized somewhat by the commissions they earn by pushing certain products on their clients. That might make them cheaper, at least in terms of your out-of-pocket expenses. But because they earn a commission, you have to look out for a potential conflict of interest. Their advice might come with additional baggage that you'll have to weigh when deciding whether to buy into a fund they are pushing.
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Finance: What is a 12b1 fee?91 Views
Finance a la shmoop.. what is a 12b1 fee what a clever name like why don't they give
normal names to these things like fund admin expense fee or just name it Bob [Document with Bob written at the top]
but they don't so you just have to memorize what they mean anyway
mutual funds had to bear enormous communications related expenses in the
pre computer-internet everyone has an email address era delivering gobs of [Mail man arrives at house]
paperwork snail mail to its customers it was enough expense to them that well
they frankly just hated doing it and did more or less anything they could to [Man licking envelopes]
avoid having to deliver you know dead trees so along came the investment
advisors act of 1940 which basically recognized that mutual funds did in fact
have expenses that were more than bonuses to the senior partners the 12b1
fee system allowed a fairly set and standard amount of fees to be charged to
customers so that a given mutual fund could recoup the money it had to spend [Fund statement document appears]
mailing annual reports and performance data and tax information and all kinds
of other things to its customers the 12b1 system was basically a
pass through set of charges such that the customer paid for her own paperwork
incentivizing mutual funds to actually do a good job communicating with their [Woman receiving a trophy on stage]
constituency and it let the little guy mutual funds compete against the big guy
mutual funds who already had all that infrastructure of course the biggest
winner out of this entire deal yeah it was the trees especially the ones who [Tree given a first prize award]
got in early on Google
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