The ABCs of Mutual Fund Shares

When no-load funds hit the market, load funds had to find a way to compete. That was the birth of B shares, which featured a back-end charge that was levied when the investor sold the shares. Now, a number of fund giants are ditching B shares entirely.

Up until the late 1980s, mutual fund shares came in one flavor and investors who bought them paid a front-end sales charge or load. Then no-load funds from fund companies like Vanguard and T. Rowe Price changed the playing field and load funds had to find a way to compete. That was the birth of B shares, which carried no front-end load, but instead featured a back-end charge that was levied when the investor sold the shares. Now, a number of fund giants are ditching B shares.

The reasons have to do with money. With front-end load shares, known as A shares, the mutual fund firm splits the up-front sales charge with the broker. With B shares, the fund company pays the broker a sales commission up front, usually about 4%, and must make up for its missing front-end money by charging the shareholder a higher yearly administrative fee. The fund gets its money back from the back-end load when the fund buyer sells, or, if the shareholder hangs on to the shares for six or seven years, the higher annual fees pay for the broker’s commission. Now, however, with the stock market still well below its highs despite the recent rally, those loads and annual fees are being applied to lower balances, making B shares financially less attractive to fund managers.

Many investment advisors also frown on B shares, but from an investor’s point of view. Some object to the back-end load feature, which they believe might influence an investor to hold on to shares that really should be sold. Others see the back-end load on B shares as a smokescreen to entice investors who are turned off by a front-end load. The best move, they contend, is to avoid loads entirely.