Understanding Mutual Fund Classes, Part 3
By Gary Silverman, CFP®
We’re four weeks into a series about mutual funds and fees. This all started with some questions a financial reporter asked that reminded me there’s a lot of ignorance in this area. Up to now we’ve looked at mutual fund “loads”. Let’s summarize:
No-load funds pay no commissions and therefore there are no commission charges (loads) built into them.
A-share funds have a front-end load where a commission charge is taken from your funds when you buy them. Your broker gets paid when they sell you the fund.
B-share funds have a higher internal fee for several years. If you sell off the fund during this time you’ll pay a load on the way out of the fund. Your broker gets paid when they sell you the fund.
C-share funds have a higher (usually 1%) ongoing fee inside the fund that lasts as long as you own it. Your broker gets paid a part of this every year.
Now, with that behind us (you might want to cut this out for future reference), we can start with the reporter’s questions. First, he asked which class of fund you should buy. He wondered if paying a load would be better if it resulted in a lower expense ratio.
Whoa! As you now know, a load is a way for a mutual fund to get the money from you that it uses to pay the financial professional for selling you the fund. If you are doing your own investing and not using the services of a commissioned adviser, then you shouldn’t be buying a fund that takes money from you to pay an adviser. So, it seems to reason that you should not buy a loaded mutual fund yourself. You, the individual investor who is making your own fund choices and doing all the work yourself should only be buying no-load mutual funds. Period.
Now, if you work with a financial adviser of some sort, then you might be buying some loaded funds. It depends. Some of us (like me) work for a fee. My clients pay me for my advice directly. So it would make no sense for us to use loaded mutual funds with them. If we did, they’d be paying twice: once to us and then a load to the fund. So advisers like me have our clients use no-load funds.
But a whole bunch of other advisers (most of them) are compensated by commissions generated by the investments they sell. With them you are not going to be given the choice of no-load funds and there’s nothing wrong with that. After all, do you expect them to work for free? In that case you’ll want to discuss with your adviser which share class makes the most sense for your particular situation. I can think of situations where any of them (A, B, or C) can make sense.
While we are at it though, I’d like to go inside the mutual funds in a little more detail and discuss the other fees that exist. We’ll cover that next week.
This article was published in the Wichita Falls Times Record News on November 6, 2016.