Comparing Mutual Fund A-Shares to C-Shares

April 29, 2010

Since I have been on the topic of mutual funds, I thought it would be interesting to look at the difference between an A-Share mutual fund and a c-share mutual fund. Since I already have the data from my other posts, I’ll use American Funds Investment Company of America to make my comparison.

For those of you not familiar, an a-share mutual fund is a front-load mutual fund. That means when you purchase an a-share, a percentage (usually around 5%) of your purchase goes to pay the front-load. The more money you invest, the smaller the front-load is as a percentage (called breakpoints). For instance, ICA’s maximum load is 5.75%. But, if you invest $100,000, your load is reduced to 4.5%. A-share mutual funds also charge a 12b-1 fee (also called a trail) that is used to compensate the broker. The 12b-1 fee for the ICA a-share is .23% per year.

A c-share is much different. There is no front-load but in order to compensate the broker, the fund charges a higher 12b-1 fee. In the case of the ICA c-share, the 12b-1 fee is 1%. This 1% is charged for as long as you own the fund. There also are no breakpoints for investing more money in the fund.

As you can probably imagine, the c-share ends up being more expensive to own over the long-run. But, that doesn’t necessarily make it a bad product. Why?

Well, when a broker is making 1% per year, there is an incentive for him (or her) to take care of the client. As their c-share business grows, there’s also less pressure for the broker to have to find new clients. Contrast that to an a-share that pays a big commission up-front. As soon as the broker earns that commission, they have to either pursue more money through that client or they have to go out and find more clients so they can earn more up-front commissions. There’s not nearly as much incentive to take care of the existing client. Sure, not all brokers work this way but some do and it is a risk of purchasing an a-share mutual fund.

So, let’s look at a numbers comparison of ICA’s a-shares and c-shares. The ICA c-shares have only been around since 2001. I like to look at round numbers so I began the comparison on December 31, 2001 through December 31, 2009. I assumed that the 12b-1 fees (I divided the annual 12b-1 fee by 4) were charged on a quarterly basis based on the account value on the last day of each quarter. Here are the results I got:

It’s not a lot of difference but keep in mind that this was for only 7 year’s worth of data. The gap will grow with time (assuming all else stays equal). Most brokers I knew NEVER sold c-shares because they needed the big up-front commission and didn’t want to take the risk of the client leaving before they could make up the lost up-front commission in trailing commissions.

9 responses to Comparing Mutual Fund A-Shares to C-Shares

  1. So what earthly purpose does a 12b-1 fee serve
    on a fund with a front end load? Or on a fund
    I buy by mail? A ripoff, that’s what….
    There’s no justification (in my mind) for a
    recurring 12b-1 fee, either, other than to
    extract an ADDITIONAL amount of money from the

  2. Harm,

    I guess I wasn’t clear. In both of these cases, the 12b-1 fee would go to the broker as a trail.

    In other cases 12b-1 fees are a ripoff. I read something in a book the other day about mutual fund companies that continue to charge 12b-1 fees on mutual funds that are closed to new investors.

  3. ** rant on **

    This crap is complicated — and anything that is complicated by design is to extra money from you.

    There is a lot of lost ‘middle-money’ here, from the commissions, funds fees, and what ever else the ‘industry’ can think of get to more of your money.

    AND you still need to be ‘good’ at picking something. If you pick a bad broker, who picks bad funds that have managers that are picking bad stocks, then everybody gets rich but you.

    I have nothing against financial advisers and others in similar business, but I think the incentives are not lined up properly. If you want to use one, find one that is NOT BIASED by design: they charge a flat-fee to look things over and give will give you “take it, or leave it” advice. I don’t need some adviser to steer me into extremely high-cost “products”/funds that only lines his pockets. And I absolutely do not want any “advice” that costs a PERCENTAGE of my money — how incredibly ridiculous is that.

    ** rant off **

  4. BG, I agree that it’s complicated. In many ways, I think B and C-share classes were created to make A-shares easier to sell. Oh and to make matters worse, LOTS of advisors sold B and C-shares as “no-loads.” What a crock that was.

  5. Hey thanks for the little mutual fund lesson.

    I never really understood about the different ways the broker makes up the lost commission with C-shares. I got a little confused about 3/4 of the way down, but your comparison chart brought me home. Thank you for putting it there for less technical people like me. A vs C. Looks like A wins.

    Thanks for sharing,


  6. A couple things that were incorrect here.

    First, a few brokers refund 12b-1 fees to clients in managed accounts because they feel it’s excess compensation.

    I’m proud to say I work for one of those brokers. That means if I charge my client an annual .8% fee, that’s all the compensation I receive.

    Also, C shares usually convert to A shares after 10 years, so a broker can’t just make money forever off you.

  7. I am a 30+ yr securities veteran. I consider myself an advisor, not a salesman.

    I disagree that most C shares convert to A shares after 10 years…

    But in C-share defense, I want to say that I have been in many training/sales meetings where mgmt would encourage the sales force to “re-look” at all their old A-share sales to see if changing funds families wouldn’t help generate new commissions… as long as the A-shares had been owned for at least 5 years there was not headache from compliance. Isn’t if interesting that a 5% up front commission, with the account moved every 5 yrs is about 1% per year average, except that with A-Shares the salesman is paid up front.

    If you want an ongoing relationship with your salesman/adviser, I think C-shares make great sense. If you are a small investor want someone to sell you something and not have time to talk to you in the future consider A-Shares.

    If you want professional help the adviser deserves compensation for his time. If he doesn’t give you time or good advise… leave.
    With A-Shares if you leave in less than 5 years you overpaid. With C-shares and you leave in 2 years the creep only gets 2% for his time.

    Those who attack C-share advisers are not living in the real world. They think that adviser can make a $500 commission (that he may only get 60% of) and then will be able to take time to keep up with your suitability and answer your questions for as long as you life with no further consideration.

    C-shares keep the adviser encouraged to give you time. When the account grows up to be $100,000 or more, then seek out a fee only adviser, if it’s not the same guy.

  8. Travis is incorrect. C shares do NOT convert to A shares in 10 years. C is forever. B shares typically convert to A shares after 7 years. Why? Because there are CDSC’s – contingent deferred sales charges for getting out of B shares. Scaled down each year – yr 1, being the highest and year 7 only 1% penalty. Then, they convert to A shares.

  9. Joe is correct. Cs do not convert to A shares. A will win out after about 3 yrs on this amount. Do the math yourself and you’ll see. C shares are much easier to sell since the client doesn’t take a hit on their firrst statement, but if you’re a long term investor, the A is by far the better choice. It’s simple. Do you want to pay $3500 upfront or a full 1% more every year forever. If you hold this fund for 20 yrs, the account would be worth 300k and you’d pay $3000 in year 20 alone, not to mention the 1% you’d pay in the other 19 yrs.

    Another glaring error that I’m surprised no one here has caught is the breakpoint on 100k. The charge would only be 3.5% with American, Franklin templeton, and most others. That glaring error in this post really chamges things more in favor of the A shares.