Something that comes up when we speak with new clients is their reason for coming to meet with us. More often than not that reason is because they hardly ever (or never!) hear from their current advisor or broker. Why do these advisors and brokers work so hard to get new clients only to never contact them? The answer could possibly be a certain type of mutual fund share they sell, and that is what Tom and Brendan discuss during this week’s Mullooly Asset Management podcast.

Let’s begin by explaining that there are two types of mutual funds: load and no-load. No-load funds are distributed directly by the mutual fund company and do not have sales charges attached to them. Load funds are the opposite of that. Brokers will never sell no-load mutual funds because they will not get paid to place money into them and their firms do not have selling agreements with the mutual fund companies who offer them.

There are three different ways that load funds are sold. They can be sold with a front-end sales charge, back-end sales charge, or low-level load sales charge.

Mutual funds sold with a front-end sales charge are A shares. When you buy A shares you pay a sales charge (usually 3-6%) initially, and that’s essentially it.

Conversely, funds sold with a back-end sales charge are B shares. Investors pay this fee when they sell the mutual fund. You might hear back-end charges referred to as contingent deferred sales charges. This fee is a percentage of the value of the shares being sold and lasts for a specified period of time. The fee will decrease annually until the specified period ends, at which time the fund could be sold with no charge. B shares also contain a small 12b-1 fee. This fee is an annual, trailing commission that goes to the broker or advisor who placed you in the fund.

Funds sold with a low-level load sales charge are C shares. With these mutual funds you pay nothing up front. Normally if you sell the fund within the first year there will be a 1% charge. The 12b-1 fees attached to C shares are much larger than those found in B shares. In most instances, the broker or advisor who places you in C shares will receive a trailing commission of about 1% for as long as you stay in the fund!

You can also learn more about Class A, B, and C shares here: https://www.sec.gov/answers/mfclass.htm

What incentive does a broker or advisor who places their clients in B or C shares have to keep in touch with them? They’re getting paid their trailing commission either way, so motivation to speak with their clients could be limited due to that fact. It’s sad but true in many cases. When we meet with new clients who haven’t been hearing from their broker or advisor, more often than not, they have an account full of C shares.

It is critical for investors to know and understand the sales structure of the mutual funds they hold. Always ask whether a fund is load or no-load before investing, and also make sure to find out what class of shares they are. Those are two (of many!) important questions to ask your advisor or broker when they recommend a mutual fund to you.

Here at Mullooly Asset Management we are fee-only investment advisors. This means we do not collect commissions of any kind. We normally try to avoid mutual funds that carry sales charges because we can often find a no-load mutual fund that will accomplish the same goal in a more efficient manner for our clients.

Now Go Talk About It!