Mutual Fund Sales Loads: Class A, B and C
Copyright Daniel E. Winslow, FSA, CPA November 24, 2015
Registered Representatives of a Broker Dealer use mutual funds with sales loads. Their compensation is commissions. Usually prospective clients do not know the commissions or sales loads of these mutual funds.
Class A mutual funds have an initial commission paid to the Registered Representative. A typical initial expense load charged to the client is 5.75%. That means if you invest $10,000 then there is $575 in initial expense load deducted from your investment.
There are volume discounts in the initial expense load for larger investments, “break points”. An example is if you invest more than $100,000, then the commission is $4,937.50 on the first $100,000 and 3.5% on the amounts over $100,000.
The reasonableness of this initial expense load is related to the soundness of the investment, the number of years the investment will be held and the motivation for changing the investment.
This is in addition to the annual expense ratio. The annual expense ratio ranges from 0.08% for a low cost index fund to 3.00% for a high cost international investment fund in a small business 401(k). So, for a $10,000 investment the annual fee ranges from $8 to $300 per year.
Class B mutual funds have a higher annual expense ratio and a contingent deferred sales charge. In one example the contingent deferred sales charge starts at 5% and gradually reduces to 0% over a seven year period. The Class B annual expense ratio is 0.75% higher than the Class A annual expense ratio for the same mutual fund. For example, if you invest $10,000, then the contingent deferred sales charge is $500 and you pay that if you sell the mutual fund in the first year. The higher annual expense charge is $75 per year more than the Class A expense ratio.
The Registered Representative gets their commission at time of sale. The mutual fund will recover this commission either through the contingent deferred sales charge if the investment is sold before seven years. Or the mutual fund will collect the higher annual expense ratio for a number of years.
Class C mutual funds have a higher annual expense ratio. In one example the Class c annual expense ratio is 0.80% higher than the Class A annual expense ratio for the same mutual fund. For example, if you invest $10,000 the higher annual expense charge is $80 per year more than the Class A expense ratio.
Class F-1 or R-1 or T mutual funds are similar in structure to Class C mutual funds. Some popular mutual funds have 20 or more classes. Class R-1, etc., are usually retirement classes for 401 (k) plans. The annual expense ratios and commissions are different between the classes. This allows the Registered Representative to choose the commission level for the situation.
In addition, there may be 12b-1 sales fees charged. 12b-1 sales fees range from 0.25% to 1.00% annually. On a $10,000 investment this is $25 to $100 in additional annual expenses.
Winslow Financial LLC does not have any Registered Representatives and does not receive commissions from any mutual funds.
The advantages of a Registered Investment Advisor (RIA) are more flexible investment choices and clearer fees. Exchange Traded Funds (EFTs) do not pay commissions and are a frequent recommendation. No Sales Load or institutional classes of mutual funds with lower annual expense ratios are emphasized.
Winslow Financial LLC is happy to do a free initial review of your investments to help you better understand your investment portfolio at (847) 217-0366.