Making Sense Of Mutual Fund Class Shares

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.