Fees eat into our returns so it pays to know what is being charged and how. After our overview about ETFs and mutual funds, we can now dig a bit deeper into mutual funds and discuss the different types of shares and the fees associated with them. Namely type A, B and C shares.
Type A shares are the most common. They consist of an up front sales charge. This is paid to the advisor/firm for recommending/providing the mutual fund to the client. The charge is 5% and tapers down as you invest more and reach breakpoints. (Breakpoints are tiers where fees are reduced). The operational/12b-1 fees are generally slightly lower than B shares.
B shares are the opposite of A shares. They are contingent deferred sales charges, or in other words, they charge the fee when the money is taken out. That fee may start at 5% and decrease over time. If the fund is held long enough, they are automatically converted to A shares. They typically have slightly higher operation/12b-1 fees.
Lastly, C shares are a compromise of the two. A lower fee, but charged annually. it is usually around 1%. So if you do the math and hold mutual funds longer than 5 years, A and B shares may be better. Some advisors charge C shares and justify it by saying they are providing you with ongoing investment advice. That may or may not be the case. I leave it to you to determine if their advice is worthwhile.
One point of clarification. Keep in mind mutual fund type shares A B and C, are different from stock share types. Usually stocks may have different types, A, B, C or whatever letter they decide to use. Different types of stock shares may have different privileges. For example, Berkshire Hathaway (BRK.A, BRK.B) has two types of shares. Original A shares, and B share which are worth roughly 1/1500 of an A share. This allows some investors to invest in this company who does not have access to the capital to invest in A shares, that and it was mainly done to allow original A share owners to gift/leave inheritance to families and friends. B shares have no voting rights and all voting rights are held by the A share holders.
In another firm, it may be that there are A shares and B shares of a stock, but B shares have all the voting rights and A shares do not, and they may have similar prices.