Whether to invest in Class A or Class B mutual fund shares

[Guest BigAl]

I'm presently with a financial advisor at American Express. Although they do have no-load index funds, their family of funds are loaded. I'm trying to decide whether to invest in Class A or Class B shares. I know that A shares are front loaded, but that the load in reduced if certain $ ammounts are invested. B shares are back end loaded, but after 6 years they convert to A shares and there is subsequently no-load. However, A shares have a .25% 12b expense/year, while B shares have 1.00%. My advosor says that A shares are better in the long run, and the brochures seem to back that up. I just hate to give up that front load and reduce my initial investment with A shares.

Any and all suggestions will be greatly appreciated.

[mbozek]

buy the index funds

[rcline46]

Without giving a direct answer certain facts have to be obtained.

Why do you need a Financial Advisor?? If you need one, how are you going to pay him/her?

If you need one, and you are paying them fees, then shouldn't you be taking their advice?

If you are NOT paying them, how do you think they are paid? Commissions of course. Buy no-loads and you won't have the advisor for long. But then, you aren't following their advice anyway so what do you care. Vanguard loves ya!

So back to the question, why do you have a Financial Advisor?

Answer that question and the rest follows.

[Guest BigAl]

I have an advisor to help diversify my assets across a broad range of funds. I do pay him a yearly fee, so I don't think commissions play a big role. It appears that you are not a fan of loaded funds, and I understand that, but, if you had to choose between Class A or B, which would you choose.

[four01kman]

If you are paying an advisor a fee, the question is not whether you should buy A or B shares of a fund, but whether you can find the same (or almost the same) fund that isn't loaded. Many load funds have the same or similar funds managed by the same manager under different distribution channels.

The issue isn't really load vs no-load, but finding the "best" fund and/or manager to suit your needs and objectives.

Having said all that, A shares are better if you are not planning on selling the shares for at least a 6 year (i think that's the crossover point for most A / B share comparisons) period.

I am an advisor and my investment recommendations are unrelated to the manner in which I get paid, my clients' needs and objectives come first.

[rcline46]

BigAl - I agree with foru01kman that on buy and hold, A shares of the same fund will outperform B shares.

If your advisor is (primarily) fee based then he is doing the research for you, or should be. Extra research on your time, unless it is only a quick check on the advisor, is not necessary.

four01kman - If your only source of income was commissions and 12b-1 fees from Vanguard and Schwab no load funds and no fees- hate to feel your hunger pains. You have to be paid somehow, either subsidized by other business, fees, or commisions. The less your living depends on the advisor income, the more impartial you become.

[four01kman]

rcline you are absolutely correct! I need to be paid somehow. All I meant was that the manner of my compensation is the last thing my clients and I discuss.

[rcline46]

four01kman - I completely agree. If you prove your worth to a prospect, they should not care how you get paid, and should hope you get paid well!

[Guest BigAl]

thank you rcline46, but I do have a question. If I buy a front loaded fund (Class A) and the load is 4.75%, how much commission will my advisor get from that? And does he get more compensation from A or B shares? Again, I pay my advisor a yearly fee, not a percentage of managed assets.

[rcline46]

The commission received by the broker is dependent on the agreement he has with the people he works for. Typical agreements range from 40 to 60%. Total commission from B shares held past the 'Deferred sales charge' period are typically higher than the 1 shot A shares. All of this should be disclosed in the prospectus.

[four01kman]

Of the 4.75% "front load" the broker who works for a "wirehouse" (one of the big national brokerage firms) will get up to 48% of the 4.75%, and then annually 48% of a "trail" of .25%.

On the "B" shares, the broker payout is typically 1% per year, again the broker will get paid his/her "grid" (up to 48% for a wirehouse broker).

Independent brokers can get up to 90% of the payout.

Hope this helps. Of course, if you are looking for someone who always has his/her clients best interests and objectives in mind, I'm certainly willing to talk with you.

[John G]

"I have an advisor to help diversify my assets across a broad range of funds. I do pay him a yearly fee, so I don't think commissions play a big role."

I am not a big fan of Am Exp or loaded funds. Frankly, they are expensive and their performance at best average. A gets you up front, B gets you with a high annual fee. Kaching. (If your assets were at Vanguard, you would probably do better because there total cost stucture is extremely low.)

But... let me address the statement about diversification. Mutual Funds were created in part to offer diversification and to allow an investor with modest assets to own a range of stocks. In the past two decades, a number of narrowly defined niche funds have been developed.... sector/regional/specialty funds like telecom, biogenetic, Japan, small cap growth, etc. Although these funds have many holdings, they tend to be clustered in one area of the market and are therefore not really diverse. If you avoid narrowly cast funds and stick with broadly defined funds you are more diversified. Especially if your funds are balanced rather than following the "hot" area. There is a second problem with achieving diversity in funds. In the 1990s, a lot of funds started to chase hot areas like tech funds and were heavily weighted in those areas... and those that were suffered more after the bubble burst. Having more funds does not mean you are more diversified if all your funds are overweighted in the same areas.

Index funds are by definition run by formula and therefore are less subject to fad investing. If the unlying basis (total stock, S&P500) is diverse, then you are getting that diversity. They are also very cheap to run... no analysts, no field trips, no expense accounts, etc. Vanguard is the undisputed King of index funds with some annual expenses below 0.2% and no front or back loads. You don't say what AMEXP annual expense numbers are for their index funds, but it should be below 1/4 of a percent. I suspect that AMEXP created them to retain investors who figured index funds were a good way to go. Lets compare A class stock picking fund to an index fund. I will assume that the annual expenses will be about the same. The stock picking fund would have to earn about 1% more than the index fund over a decade to catch up with the index fund performance since it has a 4.75% handicap "at the gate".

If you just want diversification in stocks, you don't need a financial advisor to pore over the components of mutual fund portfolios. Just go with one or two very broadly based index funds.

Your advisor is steering you to a front load set of funds. I would imagine that his compensation is either directly or indirectly related to the commissions/fees that your account rings up. Ask him. If you really want unvarnished financial advice, pay for an outside advisor who is not holding your money or selling you anything. Are you a little suspicious about why your advisor did not give you some postive comments about the value of using low cost index funds? Could it be the commissions?

You ask pick A or B. My advice is pick neither. Based upon what you have said, I would go with one or two index funds and skip the loads, high annual fees and financial advisor.

[John G]

PS: If you select an option that only works if you lock in for 6 years, then you can be stuck if the funds performs poorly and you want out. Two years ago I helped a retired women who got into some "recommended" tech funds and fortunately realized they were way to risky. I don't like long lock ins. Maybe that was OK 20 years ago, but in our society and economy things move fast change to much in six years. I prize flexibility on investments.