What are Service Shares
Breaking Down Service Shares
Service shares charge fees to shareholders to compensate individuals who answer investors’ questions and give them information about the investments in the mutual fund. The US Securities and Exchange Commission (SEC) refers to these fees as shareholder service fees. The Financial Industry Regulatory Authority (FINRA) limits service shareholder fees to no more than 0.25 percent of the fund’s average net assets per year.
A service share fee is a type of 12b-1 fee, named after a section in the Investment Company Act of 1940. Other 12b-1 fees are marketing and distribution fees. At the time of the Investment Company Act, many believed that 12b-1 fees, including service share fees, were a net positive for investors, as a well-marketed mutual fund would attract more investors, acquire more assets and ultimately lower expenses per share, as unit costs would drop due to economies of scale.
Other Mutual Fund Fees
The service share fee is far from the only fee a mutual fund may charge investors, directly or indirectly. In addition to shareholder service fees, mutual funds may charge one-time sales loads, whether front- or back-end, redemption fees, exchange fees, account fees and purchase fees as well as yearly management fees and other expenses.
Service Fees and No-Load Mutual Funds
A sales load is a fee a mutual fund may charge as a commission for the brokers. Some mutual funds advertise themselves as no-load mutual funds, meaning that they don’t impose a sales load, deferred or otherwise. That does not mean the fund charges no fees. It will still use fund assets to cover annual operating expenses and may impose other fees they charge directly to shareholders. Even no-load funds may charge a fee to shareholders for redeeming their shares too early. According to FINRA, a mutual fund cannot call itself no-load if 12b-1 fees, service fees plus distribution and marketing fees, add up to more than 0.25 percent of average net assets per year.
Service Fees and Returns
Like all mutual fund fees, shareholder service fees eat into returns, and investors should study the fund’s prospectus to determine whether the mutual fund’s returns are worth the fees. A popular investment strategy is to seek out low-fee investments on two dovetailing premises, that fees are certain while returns are not and that actively managed mutual funds often underperform the market and, by extension, also underperform passively managed index funds.