Newspaper article St Louis Post-Dispatch (MO)

Multiple Classes of Fund Shares Confusing to Investors

Newspaper article St Louis Post-Dispatch (MO)

Multiple Classes of Fund Shares Confusing to Investors

Article excerpt

Not only do investors have more than 3,000 mutual funds to choose from these days, they increasingly have several types of shares they can buy of each fund.

These "multiple classes" represent different ways to pay for shares, and as the number of fund companies offering them has grown, so has confusion.

"It's becoming more evident that not only don't some of the fund companies seem to fully understand the impact of the pricing on investors, it's also obvious that a lot of brokers and clients don't either," said David J. Bruce, spokesman for Money Marketing Inc., a Brooklyn-based consulting group that specializes in marketing investment products.

Just 10 years ago, buying shares in funds was relatively simple. Investors paid either a one-time load, or sales charge, of up to 8.5 percent of the amount invested, or they paid nothing at all.

With the multiple-class share system introduced by Merrill Lynch in 1989, the original front-loaded shares were renamed A shares. As the system swept the industry and competition grew, the average load size fell to 4 or 5 percent.

The funds' B shares, meanwhile, feature "contingent deferred sales charges" (also called back-end loads or exit fees). Deferred sales charges, which penalize investors who sell shares soon after buying them, usually now start at 5 or 6 percent and decline one percentage point a year, disappearing in the sixth or seventh year.

Deferred sales charges often are combined with annual 12b-1 fees, which pay fund marketing expenses. Because these fees can easily exceed the legal maximum for front-end loads, the National Association of Securities Dealers capped total 12b-1 fees in July at 7.25 percent, or 6.25 percent for funds that also charge a 0.25 percent annual servicing fee.

While the definitions of A and B shares are fairly accepted now, there is no uniform usage of C and D shares. Many funds reserve C shares for certain groups, often institutional investors, who pay lower commissions than retail investors, but that is not the way all funds define them.

D shares, also called level loads, were started this year by PaineWebber to sidestep growing investor resistance to paying sales loads. …

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