Houlihan Asset Management
Fiscal Fitness Blog Header.jpg

Blog

Fair Share - Mutual Fund Share Classes

There’s a trite adage I use when having (very) low level negotiations with buddies: “You cut the pie; I’ll choose the piece.”  Sadly, I have to occasionally explain this maxim – to the dimmer ones.  Likewise, the Department of Labor (DOL) is conducting much more significant talks with financial industry lobbyists, err, officials regarding the Fiduciary Rule.   As an addendum to last month’s FF (I Pledge Allegiance to Whom), we’ll update you on the latest Fiduciary Rule developments and how they may influence your investments.
 
It seems the DOL may have reached a compromise regarding mutual fund shares classes sold within retirement accounts. The proposed T shares would charge the same commission for all asset classes[i].  Traditionally, stock funds charge higher loads than bond funds. So creating level product fees would, in theory, eliminate brokers’ conflict of interest.The T share is meant to replace its higher upfront commission, A share, cousin. Ok, sounds fair in theory – so what’s the rub?  T shares will have a uniform 2.5% front end load and .25% 12b(1) annual marketing fee. That’s about as appetizing as choosing between a broccoli or cauliflower sandwich.
 
But there’s a possible white knight on the horizon: Z shares or so-called ‘clean’ shares. This share class would effectively strip out the front end and 12b(1) fee.  This transparency would obviously be most appealing to investors. The question begs how much traction this class will gain. T shares would effectively eliminate A shares and the Z shares would kill all share classes. If this alphabet soup is a bit dizzying; no problem – I’ve included quick crib notes below.

Share Classes

  • “A” Shares – Front-end load + 12b(1) fee. Usually 3-5% sales commission of the principal amount.  Break point sales dictate lower commissions at higher sales amounts - rights of accumulation.
  • “B” Shares – Back end load. Usually based on a surrender charge schedule of 5-7 years. Basically, a penalty charge is levied if the investor cashes out of the fund before the surrender charge schedule is fulfilled.  Additionally, an ongoing sales load of 1% is charged to the investor and remitted to the sales person. This is the most expensive (& arguably deceptive) class of mutual fund shares.
  • “C” Shares – Continuous load.  Up to 1% is remitted to the sales person annually. A small front-end load (1%) but no back end load is paid.
  • “No-Load” Shares – No sales load. Available to retail investors. Vanguard, T Rowe Price, Dodge & Cox, DFA and Oakmark, are examples of no-load fund families.  
  • “Institutional” Shares – No-load class with lowest available expense ratio. Usually reserved for Investment Advisors & higher investment minimums. When available, this is the fund class Houlihan Asset Management utilizes for clients.     

 
Remember, these share classes will potentially affect your retirement accounts only.  This includes your company sponsored 401k & 403b plans as well as IRA’s. We would encourage you to ask your plan administrator what potential changes are forthcoming. Be a gumshoe & scrutinize your plan expenses. It’s your money!  About 7 years ago I shared the story (Just Say No…Load) regarding Michelle’s 401k plan. The company re-bid the plan which effectively saved participants 1%/year. I figure this move has had a cumulative plan savings of six digits – not chump change. Ignorance is not bliss when it comes to portfolio expenses. Keeping them lean will help fatten your bottom line.

[i] Waggoner J, Investment News,  May 2017, pp 11.