When you purchase a mutual fund, you must select the class of shares to own. You may also be choosing different funds and managers. The only significant difference among the different shares classes is the amount you will pay in expenses and the amount of commissions your broker will receive for selling you the fund.
Before purchasing B shares in a mutual fund, your broker should perform a careful analysis to determine whether Class B shares are suitable for you. Part of this analysis includes the broker determining how long you plan to hold the fund, the size of your investment, the expenses you will pay for each different class of shares, and whether you qualify for commission discounts or other breakpoints.
The most common selling point for Class B shares is that they do not impose front-end sales charges. Class B shares do, however, charge a significantly higher annual expense (12b-1 fee) to the fund holder than do Class A shares. This means that your investment performance is constantly being charged more in expenses than perhaps is necessary. Additionally, Class B shares usually impose a contingent deferred sales charge (CDSC), which is an expense to the investor if the shares are sold within a certain number of years.
Class B shares also deprive investors of breakpoint discounts on commissions earned by a broker. Large purchases of Class A shares receive discounted commissions. Purchases of B share do not.
In June 2003 the NASD censured and fined a brokerage firm, suspending its chairman and directing that restitution be paid to customers for, amongst other things, recommending the purchase of large positions in Class B shares. The NASD found that this sales practice violated NASD suitability rules.
The NASD National Adjudicatory Council has also held that a broker’s suitability obligation encompasses the requirement to minimize sales charges paid for mutual fund shares when consistent with customer investment objectives.
Just because your broker recommends mutual funds does not, in and of itself, indicate that the recommendation is in your best interest. If you have any concerns or questions about why you are invested in the type of mutual fund you are invested in, please contact us for a free consultation.