What is the difference between A, B, and C mutual fund share classes. And why you should never purchase any of them.



A mutual fund owns shares in stocks (hundreds and sometimes even thousands of different stocks).  You, as the investor, can own shares in the mutual fund which means you own a small percentage of all the stocks that the mutual fund owns.  A, B, and C, are different types of share classes.  The difference between these share classes are the fees that the investor pays to purchase the investment.  Some of these fees go to the financial advisor selling you the shares.  A basic description of these share classes are below:

Class-A - These shares charge a  front-end load.  A load is a fee charged by the investment company.  A front-end load is taken right off your initial investment.  These fees can be around 2-6%. For example, if you invest $100,000 in a Class-A share mutual fund with a 5% load you would pay a fee of $5,000.  You would never write out a check for this amount, instead you receive fewer shares. Your total investment after fees would only be $95,000.

Class B - These shares have a back-end load. This works that same as a front-end load except that you pay the fees when you sell your fund.  Let’s say that same $100,000 is invested for a year and grows to $110,000 – a 10% return, and now you want to sell your fund. Since it is a back-end load you would only receive 104,500 after fees - lowering your rate of return to 4.5%.

Class C - These shares have a level-load. This class of fund has a higher on-going expense ratio which results in spreading the load out over a number of years.  The expense ratio is an annual amount charged by the mutual fund to manage your money.  These can be some of the worst investments for long-term investors because the high, on-going expenses can add up to significant amount.

So, which of these shares classes should an investor choose?  None of them.

Why are loads bad?

Completely Unnecessary.

 The most obvious reason for these unessential loads is that there are always (I haven’t seen otherwise) alternative funds with similar investment strategies that do not carry a load.

Did you hear that?!  These fees are completely unnecessary!

I'll say it one more time for emphasis, Loads and Commissions paid on mutual funds are completely unnecessary!

Mind blown.

However, your advisor may not mention this because it becomes a much harder sell when you lose 5% of your money right away.

Creates the Wrong Incentives.

Loaded Funds can incentivize your advisor to trade your account unnecessarily in order to generate fees.  A commission based advisor may say something to the effect of, “These funds that we purchased a couple years ago are not as good because of [insert reason here]. These new funds are much better. Let’s sell the old ones and buy these new ones.”  Whether or not there is a good reason you are generating more revenue for your “Advisor”, not yourself.

They also incentivize your advisor to sell you the funds with the highest loads/commissions, whether or not they are the right funds for you (and remember, loads are unnecessary, if they have a load of any kind they are not the right funds for you).  

The Alternatives

American funds are very popular funds that are often pushed by Traditional (Commission-Based) financial planners.  Below is one example of a very popular American Funds Mutual Fund compared to a lower-cost alternative.  You should be able to find a comparison for any loaded-fund without the load.

American Funds Income Fund of America A – AGTHX – This is a US Large Cap Value Fund with a 5.75% front-end load and a 0.59% annual expense ratio.

An better alternative would be Vanguard Value Index Fund – VIVAX, which provides the same US Large Cap Value Exposure but without a large front-end load and a much lower annual expense ratio of 0.24%.

A 10-year performance chart can be seen below, which shows that these funds move very close together (the Vanguard fund in blue and the the American Fund on gold).

Vanguard versus American Funds - US Value.JPG

Let me know if you would like comparable alternatives to any funds that you currently own or are considering purchasing.

I have heard from people who have worked with commission-based planners say that they do not pay their advisor anything.  This could not be further from the truth.  These loads, which are paid by the investor, are only one of the ways your commission based financial advisor is paid – don’t get me started on the payouts on whole life policies. 

Refer to this blog post with a video on why Advisor Compensation is so important to the investor.  Butcher versus Dietitian.

The key point is that an investor should never, ever, ever buy a loaded fund.

Phillip James is a Fee-Only Advisor.  This means that we pay on a percentage of the assets that we manage for you.  We never receive any referral fees, commissions, loads, or other type of compensation that would create a conflict of interest.  With Fee-Only we are not incentivized to sell Products, instead we suggest the best investments for your situation.

So, overall, what did we all learn here today? When considering a financial advisor look for qualities you would find in your dietitian, someone looking out for your best interest. Do not look for qualities that would be found in your butcher, someone who is looking to sell you products to increase their own well-being.  (if you don't get the dietitian and butcher reference, click on the above link).