Good riddance to Class B mutual fund shares

Posted: June 4, 2013 in asset management industry, Class B shares, financial advisors, mutual fund expense ratios, mutual funds, Uncategorized
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When I first began writing about mutual funds in 2000, I was horrified at how expensive many of them were and how diabolically clever and incomprehensible the expense ratio and load system was to the average investor. In fact, one of the reasons I started writing about mutual funds was that I owned some and wanted to understand how they worked (or didn’t, as the case may be).

In any event, one pleasing trend in the asset management industry is declining expenses. When I wrote about mutual funds regularly — for 10 years as the mutual fund columnist for Better Investing magazine — I was on a continual campaign of education about expenses and how they undercut fund returns.

So you can imagine how happy I was to find out that one of the casualties of the war on expenses has been Class B shares, according to the WSJ’s The New ABCs of Mutual Funds. These expensive, obnoxious fund shares tend to carry higher than average ongoing expense ratios plus a painful back-end load or sales charge. Once an investors is in a Class B fund share, it’s hard to get out for years without incurring a large sales charge on the way out.

And as anyone who is familiar with basic math in the asset management industry knows, the higher the expenses, the bigger the hit on returns. So in return for investing in generally worse performing Class B shares, investors pay higher fees and have to pony up to get out before five years, which is when the load typically disappears. Though, in some cases, it can last as long as seven or eight years.

I’m thrilled to see that investors as a whole are wising up and choosing lower fee options such as institutional class shares. And not a little of this trend is due to financial advisors, who have become much more proactive in protecting their clients’ best interest and placing them in low expense mutual funds.

As I see it, the extinction or at least marginalization of Class B shares is a benefit for all investors, In most cases, I don’t think it makes sense to buy a fund that carries any kind of sales charge, but if you’ve got to do it, the institutional class is the best deal.

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