Comments on: Comparing Mutual Fund Classes

By: Andrew Davidoff

Andrew Davidoff — Sat, 29 Dec 2007 18:33:59 +0000

What is a mutual fund with class R-3.

By: » Weekly Roundup on Blueprint for Financial Prosperity

» Weekly Roundup on Blueprint for Financial Prosperity — Mon, 13 Nov 2006 23:51:51 +0000

[...] JLP explains mutual funds in painful detail. [...]

By: sman

sman — Fri, 10 Nov 2006 21:18:13 +0000

JLP,

One thing that was not mentioned is the fact that some fund company’s C-shares actually convert to a different share class after a certain period of time. For example, American Funds C-chares convert to F shares after 10 years. These F shares are, on average, 3-4 bp more expensive than the A shares. I know this wasn’t intentionally left out, but thought you may want to know.

By: Mark

Mark — Fri, 10 Nov 2006 20:58:35 +0000

You guys make really good points about B shares. I go through a financial advisor on most of my investments and the two mutual funds I invest through him I have some in a C share that I had earmarked for short term investments (plan to buy a house in a few years when I started it), and the rest I had in a healthcare B fund that I planned to keep for retirement.

By: Jeremy

Jeremy — Fri, 10 Nov 2006 17:18:09 +0000

Thankfully, B-shares are on their way out and many fund companies are eliminating them all together. B-shares were being seriously abused in the advisory business because they are technically no-load because of no up front fees. The problem was, advisors would sell these based on that, and would not put much stress on the fact that by selling the fund early, whether 5, 6, or 7 years a CDSC would apply, and accompanied by the internal sales charges they would end up paying much more than if they would have just purchased an A-share to begin with.

When I was an advisor, I inherited a book of business and unfortunately many of the clients were in B-shares. The problem was they were sold these by an advisor who made them look like no-load funds, and they meet with me 3 years later and want to change funds, and they were shocked to see a 3 or 4% CDSC to do that. Of course, this was an unpleasant surprise to them.

Luckily, at our firm more restrictions were put in place and B-shares couldn’t even be sold to anyone who held an aggregate of $50,000 in mutual funds anywhere, not just with the firm. This was to ensure breakpoints could be met on most A-shares.

There is a few instances where B-shares can be cheaper than A or C, but if I remember correctly, it is a very unique situation where many criteria must be met, based on dollar amount, exact time held, etc. I’ll try to dig up that article, but from what I recall it was from an advisory magazine trying to argue a point on how B-shares could be a good option.

What makes this really bad is that an advisor makes the same commission whether they sell an A or B share, even with no up-front load on the B. This makes it too easy for an advisor who doesn’t have the client’s best interest in mind to recommend B over A because the client doesn’t pay any initial load, so that is obviously an easier sale.

IMO, B-shares are never a good option. But as always, a good real example as to how the various fees among different share classes can eat into your total returns.