Mutual Fund Class A Sales Favor Fee-Based NAV Pricing Over Loads

May 13, 2010 at 08:00 PM
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As financial advisors move increasingly to fee-based pricing for their clients and away from commissions on investment transactions, mutual funds are seeing a related drop in Class A share sales with front-end loads, a new Strategic Insight (SI) study of fund sales trends shows.

Traditionally, these front-end-loaded Class A shares have served as the primary class pricing structure through which brokers and advisors sell funds. But now, the growth of fee-based mutual fund sales is driving down the use of loads, the study published by SI, a New York-based mutual fund research firm, shows.

In 2009, 68% of fund managers' A share sales made through advisors were done as no-load, net asset value (NAV) sales. This compares to 66% in 2008 and 58% in 2007.

"These sales trends in A shares are being driven by the evolving way that financial advisors sell mutual funds to their clients," SI senior analyst Dennis Bowden, the report's lead author, said in a note. "Mutual fund sales are moving away from high-commission models as more funds are sold in a structure where advisors receive fees for advice. As this trend continues, fund sales through share classes without a front-end sales load will also continue to expand."

Also in 2009, Class A shares sold at 4% or higher commissions declined to 13% of total A share sales, down from 14% in 2008 and 16% in 2007. And while sales at NAV continued to make up an increasingly dominant portion of sales, overall fund sales through A shares, both with and without a front-end load, continued to decline during 2009. Class A sales accounted for just 40% of total mutual fund sales among survey participants, down from 43% in 2008 and 46% in 2007.

SI based its study on a survey of 32 fund firms that distribute primarily through advisors. Survey participants managed in aggregate $3.3 trillion in U.S. open-end stock and bond fund assets as of the end of 2009, representing roughly half of industry-wide long-term fund assets.

"The pricing flexibility of A shares continues to meet the needs of a wide range of investors and financial advisors, but the share class does face challenges in maintaining its traditional dominance over fund sales given the overarching movement toward the fee-for-advice model," Bowden said.

Read a story about Strategic Insight's report on fund inflows from the archives of InvestmentAdvisor.com.

Read a story about Vanguard's Research on bond diversification from the archives of InvestmentAdvisor.com.

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