Doesn’t everyone like to know what they are paying for? Well…that depends on who you ask. If you ask the Securities and Exchange Commission, the answer is maybe. The SEC has proposed limitations and disclosure requirements for charges associated with mutual funds. And not only is it important to understand those possible changes, but also to understand mutual fund classes.
Class A mutual fund shares have front-end loads. This means that you pay a commission when you first invest in the fund. Now, the downside is that all of your money doesn’t go to work right away. But the advantage is that Class A shares tend to have lower 12b-1 fees (advertising and marketing fees). And A shares have break points: the load you pay is reduced when your investment reaches a certain amount.
Class B mutual fund shares have back-end loads. That means that you pay a commission when you redeem your shares. The upside is that all your money goes to work right away, but the downside is that these shares usually have higher 12b-1 fees. Also, B shares don’t have break points.
Class C mutual fund shares carry a level load…this means that you pay a fee (in the form of 12b-1 fees) every year you own shares. In addition, these shares have a back-end load to pay when you redeem shares (though it tends to be lower than B share loads, and might be waived if you are invested long enough).
As a rule, I do not recommend class B or C shares because of the fees associated with them.
Now, the SEC wants to enforce limits on the amount of trailing fees that can be charged (which would affect class C shares). And the agency wants to require that trade confirmations disclose any commissions (and deferred charges) that are incurred in the transaction. Today, brokerage firms are not required to disclose sales charges on confirmations.
But if you ask Raymond James COO Chet Helck, “I’m not sure you have to limit 12b-1 fees”. And his reasoning: “…if you assume there is an ongoing advisory process or service, a revenue stream commensurate with the service provided is appropriate”. Well, that’s not an assumption I’m willing to make.
Disclosure: "No Positions"