Finding the right mutual fund is no small feat – but the difficulty doesn’t end there. Most funds have an alphabet soup of share classes that investors often find hard to digest. These share classes (labeled by letter, with A, B and C the most common) all hold the same investments but have different fee structures.
A shares, for instance, have an upfront sales charge, or load; C shares impose a charge when you sell. And then there are B shares, which can have deceptively high annual fees. But in a world that only seems to get more complicated by the day comes a surprising development: The industry is about to make things simpler.
In all, more than 400 mutual funds have eliminated at least one share class in the first half of the year, 40 percent more than did in the same period a year ago, according to fund researcher Morningstar. The reason? It costs firms less to run funds with fewer share classes, says Ben Poor, analyst at research firm Cerulli Associates. Analysts also say fund firms are facing fiercer competition from no-load funds, which don’t have any sales charges at all. Of all the broker-sold funds last year, 62 percent had no sales charge or had a waived load, up 11 percent from the previous year, according to fund research group Strategic Insight.
Though the trend is ultimately good news for investors, the fund industry isn’t trumpeting it, perhaps because it draws attention to the convoluted pricing still in place. Aside from being a headache to navigate, some share classes come with potentially hidden costs, says mutual fund analyst Adam Bold.
B shares include a steep penalty for selling out of the fund too early, which investors often don’t realize until they want to sell. B shares "lend themselves to bad brokers saying that there’s no load," says Morningstar mutual fund analyst John Coumarianos.
As for those investors already in B shares? Don’t expect special treatment. Their B shares may convert into other share classes over time, but they’ll still be penalized under the old conditions for cashing out early. Fewer share classes could mean less choice for investors, says Bold. But sometimes, simpler is better.
In April, American Funds eliminated its B shares, which charged a penalty if investors sold within seven years. The firm says investors were "losing interest."
Evergreen Investments, a subsidiary of Wells Fargo, eliminated its B shares in June, responding to "client needs."
Charles Schwab didn’t have load funds, but the firm threw out all its share classes, saying it wants to offer all investors lower fees.
Source: The New York Times Syndicate