No-Load Share Classes Without 12b-1 Fees Tops in Mutual Fund Sales: Strategic Insight

No-Load shares accounted for 47% of total fund sales during 2010, followed by A shares

No-Load share classes, particularly those without 12b-1 fees, have become "the single most important share class in mutual fund sales through intermediaries," according to a new study by Strategic Insight (SI).

The newly released report, “The Strategic Insight 2010 Fund Sales Survey: Perspectives on Intermediary Sales by Distribution Channel and Share Class,” found that No-Load shares accounted for 47% of total fund sales during 2010 among managers primarily selling through financial advisors, rising significantly from 42% in 2009 and just 34% in 2007.

Following the 47% of sales for No-Load shares, the next-biggest share class in 2010 was “A” shares sold at NAV, which accounted for 28% of mutual fund sales through intermediaries in 2010, the report found. Traditional “A” shares sold with a commission came in third, with 14% of fund sales through intermediaries in 2010 (and just 6% of this total via high commission “A” shares--with 4% or greater sales load), the report states.  

Much of No-Load shares’ recent growth has come from fee-based advisory programs, which have seen demand shift rapidly toward the lowest-cost share classes. During 2010, No-Load shares made up 60% of total Fee-Based Advisory Program sales, up from 41% in 2008. Within these numbers, 83% of such No-Load share sales within fee-based programs in 2010 came via share classes without 12b-1 fees (up from 72% in 2009).

The study was based on Strategic Insight’s proprietary survey of 40 fund firms that distribute primarily through financial advisors. Survey participants managed in aggregate $4.4 trillion in U.S. open-end stock and bond fund assets as of the end of 2010, representing 56% of industry long-term fund assets.

“Clearly, the movement toward advisors being compensated through fees-for-advice has been an important secular trend impacting fund sales for some time,” said Strategic Insight senior analyst Dennis Bowden, the report’s lead author, in a statement. “More recently, the growing demand for the lowest-cost share class within fee-based programs has added new dynamics to this trend.”

As fee-based advisory programs continue to grow in importance, Strategic Insight notes that these trends in share class use also carry important implications regarding overall shareholder costs and potential Rule 12b-1 reform by the Securities and Exchange

Commission (SEC), which the SEC is expected to take up in late July. “The findings of this SI study, in particular the significant and ongoing reduction in the use of share classes charging 12b-1 fees, raise the question of whether marketplace forces are reducing, if not eliminating, the need for a radical remake of Rule 12b-1,” said Avi Nachmany, Director of Research at Strategic Insight, in a statement.

Bowden added in an interview with AdvisorOne that while SI’s research shows a reduction in the use of share classes that charge 12b-1 fees, SI does not think this trend “alleviates the need for the SEC” to consider revisions to mutual fund distribution fees under Rule 12b-1.

SI also noted other key sales trends from its study:

  • Sales of No-Load shares in total grew by 25% on an absolute basis in 2010 among firms selling primarily through financial advisors – the fastest growth rate of any share class.
  • “A” share sales continued to decline among our peer group of managers – falling from 46% of total fund sales in 2007 to 38% in 2010. Within “A” share sales, “A” shares sold at NAV (without a front-end sales load, but generally carrying a 12b-1 fee of 0.25%) declined from 33% of total fund sales in 2008 to 28% in 2010.
  • Increasing sales via fee-based programs spurred No-Load shares’ overall growth, partly at the expense of “A” shares sold at NAV (without a front-end sales load, but generally carrying a 12b-1 fee of 0.25%). Within fee-based advisory programs, “A” shares at NAV have declined from 59% of sales in 2008 to 40% in 2010.
  • Aggregate Fee-Based Advisory Program sales, which span across several standalone distribution channels, accounted for 37% of total fund sales in 2010 among firms selling primarily through financial advisors, up from 34% in 2009. On an absolute basis, Fee-Based Advisory Program sales grew by 30% in 2010, a faster rate than any standalone channel captured in our study.
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