Recite the ABCs of the Share Classes

Physician's Money Digest, June15 2004, Volume 11, Issue 11

Got the B-share blues? Don't knowan A share from a C share? If youinvest in mutual funds through abroker or other commissioned investmentadvisor, you'd better learn your ABCs.

A, B, and C shares, referred to as shareclasses, are different ways to pay for theadvice and assistance you receive whenselecting and buying shares in a loadmutual fund. Recently, the SEC and theNational Association of Securities Dealers(NASD) have gone after several financialfirms for pushing B shares when A or Cshares were more appropriate. The NASDalso issued an alert urging consumers to becautious about buying B shares.

Commission Fees

Class A shares are the upfront salescharge—or load—that brokered mutualfunds have traditionally charged (up to5.75% of invested principal). A-share fundswill also likely charge a small annual 12b-1fee, typically 0.25%. Many no-load fundsalso charge 12b-1 fees, usually 1%, to coversales and marketing costs.

Instead of an upfront charge, B-sharecharges are deferred, or back-loaded. Youpay the charge only if you sell your investmentwithin a certain number of years—typically 6 years. The early redemption feenormally declines each year until it reacheszero. A B-share fund will also charge anannual 12b-1 fee that's much higher thanthe 12b-1 for A shares. If you hold on to theB shares long enough, say 7 or 8 years,most will convert to A shares with thelower 12b-1 fees. But not all do, so checkthe prospectus to see if they convert.

Sometimes called a "level-load" share,class C shares don't charge an upfrontcommission or a back-end redemption fee(unless you redeem shares within the firstyear). You pay a 12b-1 fee annually—usually1%—for as long as you stay invested.

So, which type of share class is best foryou? The answer, as is often the case infinances, depends on your situation.

A shares usually are the best choicewhen you plan to stay invested in a particularfund for several years, or if youhave a large amount to invest over thenext year because you receive a discounton the sales charge. The more you invest,the higher the discount, though thebreak points vary from fund to fund.

Because of the redemption fee, onlyinvestors intending to stay in the fund forseveral years also should use B shares. Butcritics point out that B shares have twomajor drawbacks: higher annual 12b-1 feesand no volume discount.

Share Decisions

Journal ofFinancial Research

One study by two professors, publishedin the Summer 1998 issue of the , contends that B-shareexpenses can actually be slightly less than Ashares, assuming you keep the shares forseveral years. A lot depends on how manyyears you must stay in the B shares beforethey convert to A shares. Some plannersclaim that B shares work best for funds youintend to stay in 4 to 6 years.

C shares are a stickier business. Whilethey might appear the most temptingbecause you don't pay any upfront orback-end commission, most experts saythey work best for investors who don'tintend to stay in a fund for more than 3years. Investing should be for the longterm, of course, though research showsthat many investors buy and sell funds frequently.For those investors, C shares areprobably the best choice.

Another factor to keep in mind is tocarefully compare operating expenses. Theoperating expenses of an A-share fund atone mutual fund company might be higherthan expenses at a comparable B-sharefund at another company, thus erasingsome of the advantages of the A shares.

This article has been produced by the FinancialPlanning Association (www.fpanet.org), which isthe membership organization for the financialplanning community.