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Mutual Funds – B Shares are a Dumb Ox

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English: Oxen in Marine Drive, Mumbai, India.

I’m guessing that our family is no different from most in that we have some unique ways of communicating.  For example, beef tenderloin was a dish that my wife would make on a number of special occasions as the kids were growing up.  She cooked it in a black roasting pan with white specs, hence beef tenderloin is forever know as “polka dot pot meat” in the Wohlner house (the black roasting pan is long gone).

In this same vein, the word oxymoron has been changed to “Dumb Ox” in Wohlner speak.

Several years ago I was having lunch with a CPA who was also licensed as Broker Dealer and sold securities including loaded mutual funds to some of the firm’s clients.  I’ve never understood how a trusted advisor like a CPA could turn around and sell financial products for a commission, but that is for another post.  Over lunch the CPA said “… I know that you will disagree, but I often think there is nothing better for many clients than a good B Share…”   He’s right I do disagree, to me a “Good B Share” is the ultimate “Dumb Ox” (no offense to any Oxen intended).

Share Class Comparisons

In the world of commission and fee-based financial product sellers, one way for these brokers and registered reps to be compensated is via commissions from selling mutual funds.  The main share classes where this occurs are A, B, and C Shares.  Using the American Funds Growth Fund as an example let’s take a look at the differences in these three share classes:

Share Class Ticker Front Load Deferred Load Expense Ratio 12b-1 fee
A AGTHX 5.75% 0% 0.71% 0.24%
B AGRBX 0% 5.00% 1.46% 1.00%
C GFACX 0% 1.00% 1.49% 1.00%

Source:  Morningstar.com

The American Funds, like an increasing number of fund companies no longer sells B share mutual funds.  However, even if there are no new B shares being sold; many investors are still trapped in the overpriced funds by the surrender charges.

With the A shares, a $10,000 investment would incur an upfront sales charge of $575, meaning that $9,425 would be invested in your account.

The No Front Load Option – B Shares

As an alternative for investors who didn’t want to pay the upfront sales charge B shares were created.  While there is no upfront sales charge and the entire $10,000 is invested, the ongoing expenses of the fund are considerably higher.  Additionally you are literally trapped in the fund by the deferred sales charge which starts at 5% and declines by 1% each year until it goes away altogether in year 6.  While you can generally exchange your fund for another B share fund in the same fund family, you will get hit with the surrender charge should you sell any or all of the shares.  At the end of the surrender period the B shares are supposed to revert to the less expensive A shares.  I’ve heard of instances where B shares were not automatically moved to the A shares, it is always a good idea to read your brokerage statements.

What if I still own B shares?

If you hold B shares of any fund family I suggest the following:

  • If your fund has moved out of the surrender period and has not moved to the less expensive A shares call your financial advisor and ask why.
  • If your fund is still in the surrender period do a cost/benefit analysis to determine if moving out of the fund and buying into a less expensive (and presumably better performing) alternative would be cost effective.  Basically you want to look at the difference in the annual expenses of the B share fund vs. the alternative and determine how long it would take you to breakeven after incurring the surrender charges based on the cost savings.
  • Consider firing the financial advisor and the firm that put you into the B share in the first place.  I’ve been in this business a long time and I can’t see any reason to have put a client into a B share except greed (though I’m open to listening to other explanations).  The ongoing payments to the brokerage firm (the 12b-1 portion of the expense ratio) and the “handcuffs” placed on shareholders by the surrender charges are quite lucrative for the broker, and serve to reduce your returns.  At the very least confront the advisor and ask them why you were sold a B share in the first place.
  • I’m biased on this subject and in the interest of full disclosure I am a fee-only financial advisor and I do not accept commissions or sales loads of any kind.

As always, be sure that you understand ALL expenses and fees that you will be paying when working with a financial advisor.  What you don’t know can really reduce your investment returns.

Please feel free to contact me with your financial planning and investment questions.

Check out Morningstar.com to review and analyze your mutual funds and all of your investment holdings.  Get a free trial for their premium services. 

Photo credit:  Wikipedia

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Comments

  1. Good post Roger! I never understand why someone would willingly go into B-shares, especially with the cost. Sure, you get to put the whole amount to work, but it can be eaten away by fees. Those expense loads just make me shudder, which is part of the reason why I’d recommend a fee-only advisor if you’re in the right situation.

    • Roger Wohlner says:

      John thanks for your comment. Based upon my experience it seems that in many cases investors where put into these shares by “advisors” whom they trusted to look out for their best interests. Many investors don’t know the right questions to ask and many reps/brokers are not forthcoming with this type of information and I don’t believe they are required to.

  2. Great post, I like the tips on making sure you have moved classes after the waiting period. I think “advisors” that put their clients into these are only looking out for one person (them) and at the same time are making it hard for good advisors to make it. They create a bad name for everyone. Keep up the good work showing how it all works so people understand what they are getting into!

    • Roger Wohlner says:

      Thanks for the comment and the compliment Andrea. What really prompts me to write about these types of issues is having helped clients undo the handy work of some of these “advisors” over the years.

  3. Due to the explosion of better options (ETFs, and low commissions for individual stocks) there are few (if any) load mutual mutual funds that make sense for the individual investor. As you say B Shares are really “a dumb ox” investment. I’m surprised institutions can even find people to sell these too. That just shows the need for more education. Thanks for providing it.

    • Roger Wohlner says:

      Ken I totally agree in fact load funds have never been a good idea whether front-end or like the B shares back-end. Thankfully most of the major fund companies (PIMco, American Funds, etc.) no longer offer B shares for new investment. The issue is that there are still a number of investors with money in previously sold B share funds and they need to monitor these holdings and also question the advisor who sold these shares to them.

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