Putting order to mutual fund class shares is no small task for consumers given the fact that the total universe of share class choices available is 2.5 times the number of mutual funds.

Data from the Investment Company Institute, Washington, indicates that there are currently 7,989 mutual funds and 20,610 share classes. Those share classes include multiples of classes that appear in different funds. For instance, a class ‘A’ share with a commission paid up front is available in numerous funds. Each ‘A’ class choice in a fund would be part of that total.

Front-load funds represented $1.79 trillion or 27.5 % of the $6.51 trillion in total assets in open-end funds, according to data provided by Morningstar, Inc., Chicago (see accompanying chart.)

But a Google search found share classes represented by just about every letter of the alphabet not to mention share classes particular to different distribution channels ranging from advisors to retail customers to institutional funds.

For instance, a representative with Fidelity Investments, Boston, refers to different classes of A, B, C, T and I shares within Fidelity’s advisor funds. And within those classes, there are additional differences depending on the type of fund purchased and the amount of purchase.

“There is an alphabet soup, no doubt,” says David Larrabee, senior vice president-territory sales with American Century funds, Kansas City, Mo.

The question that any investor should ask is at what time classes such as A, B or C are appropriate, according to Larrabee.

In order to determine whether something is appropriate, it is really necessary to look at the size of the assets that are being discussed as well as the circumstances surrounding the individual investor, he explains.

For example, if you are going to be in a fund a long time, it is better to be in an ‘A’ share because over time you more than make up for the upfront load,” Larabee says. The front-end load leaves less money for investment when an investment is first made; so, he explains, if an ‘A’ share had a 5.75% up front load, 94.25% would be available for investment.

With a ‘B’ share, he continues, the full $100 would be available for investment. However, according to Larrabee, if an investor left a fund early, there would be a surrender penalty. When asked if it would be similar to a loan made to an investor, he agreed.

For investors with a shorter time horizon, the advisor may recommend a ‘C’ share, which is a level share load that is a de facto wrap program, he says. This type of fund share can work for consumers who don’t want to go into a formal wrap program, Larrabee continues. The usual charge is 1% for equity funds and 75 basis points for fixed income funds, he adds.

With the ‘A’ share class category in general, there can be more of a break point at certain levels of investment. And with the ‘B’ share class, there can be higher 12(b)1 fees, he adds. The concern that has surrounded 12(b)1 fees is that they have been sold inappropriately, he continues.

The continued use of ‘B’ shares by companies will depend on issues including simplicity and regulatory suitability, he says.

“American Century is monitoring the ‘B’ share trend but “we are very much committed to the financial professional. There are times when it is very appropriate,” according to Larrabee.

If the trend to stop using ‘B’ shares continues or if distributors indicate that they are changing their handling of B shares, American Century could consider changing its position, he says.

Brian Lewbart, a spokesman for T. Rowe Price, Baltimore, says that although the mutual fund family is a no-load fund family, it does have two classes for intermediaries: the Advisor class and an ‘R’ class share. The Advisor class, he explains, is used for intermediaries who have 12(b)1 fee shareholder servicing costs while the ‘R’ class is for advisors who are putting together a 401(k) plan. These share classes are being offered to create a diverse set of funds for advisors, Lewbart continues.

Looking at the entirety of share classes, Barbara Roper, a consumer advocate with the Consumer Federation of America, Washington, says the real question is “Does it need to be this complicated?

“Can you really expect investors to make a decision as to what there best interests are when there are so many choices?” she asks.

Potential investor confusion is one issue, according to Roper. A second issue, she says, is that the incentive is in the broker’s interest rather than in the investor’s interest. For instance, she says that ‘B’ shares offer generous compensation. But, the sale of ‘B’ shares, Roper adds, is part of a bigger problem: the fact that mutual funds are negotiating broker’s fees when a broker and client should be working out what fee is appropriate.

Mercer Bullard, an assistant professor of law with the University of Mississippi, Oxford, Miss., and an expert on mutual funds, says that fund classes depend on different distribution channels being used and needs of investors. Unfortunately, he continues, disclosures and collection of fees differs by class.

So, for instance, with an ‘R’ class where there is an institutional arrangement, there can be difficulty determining who is paid, he says. If a plan administrator is paid, for example, it may be appropriate as long as there is full disclosure regarding compensation, he explains. There needs to be full transparency, he says.

Bullard notes that while the system can be confusing, the number of choices is the result of a desire to provide more consumer choice. This, he continues, can actually be fairer for consumers who get what they are paying for.

Of ‘B’ shares, Bullard says that their use by some funds has created significant problems but some fund families are not using them any more. He adds that he thinks that eventually ‘B’ shares will go away.

Bullard also maintains that regulators need to make sure that there is a consistent disclosure of costs among classes. And, he says, there is a need to separate mutual funds from the payment of fees to brokers. Fees should be negotiated by consumers directly, he says.