C Shares Changing?

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Aug 11, 2008 12:00 pm

I havent heard any details, only rumors, regarding C Share fees changing or being eliminated ? Anyone have any info?

Aug 11, 2008 12:54 pm

They've been saying that for years.  We'll see.

Aug 11, 2008 1:39 pm

What I see as a real possibility is putting a limit on the # of years you can collect 1% (vs. 25bips).  I would see the industry being forced into an arrangement similar to what American Funds currently uses, where the C share converts to an F share after 10 years (basically an A share without the upfront load).

 
I say this seems like the most probable direction because it will be the least disruptive to the industry in the short term.  I can't imagine FINRA saying that effective tomorrow there is no such thing as C shares, or that you can no longer charge 1%, or whatever.  I also think this avoids the greater disclosure requirement.  Thought that seems logical, making brokerage firms disclose the 1% trail on statements could actually be a logistical nightmare (in other words, treating it like a "fee"). 
 
I think this makes sense, since it forces firms/advisors/clients to decide (a) commissions or advisory fee, and (b) if they decide commissions, there is no financial incentive to "encourage" C shares or A shares - they will both result in relatively similar commissions.  Personally, I think there should be no share classes, just C shares.  It avoids confusion, conflicts, etc.  That way there would be no debate about "a shares are better long term, blah blah".  Either that or A shares should be commissioned like stocks (or closed ends) - small commissions to buy and sell, but none of this monster up-front load stuff.  Frankly, there are simply too many compensation choices, and it is confusing for the client.
 
Unfortunately, most people could not survive the first few years on c shares alone.  The average advisors that survives probably brings in about 15-20mm their first 3 years.  Let's assume for arguments sake that ALL of it was investable (which is unlikely).  That means they collected 50K gross yr. 1, 100K yr. 2, and 150K yr. 3.  That's not bad, but at any place other than the wires, you will only get a salary the first year or so of production (I think).  So net, you are looking at 30-50K in yr. 2, and 45-75K yr. 3.  Pretty tough to last like that.
 
 
Aug 11, 2008 4:19 pm

I agree with the B-share argument.  That's sort of a forgone conclusion in my mind.

 
Good question on the F-shares.  I think for processing and tracking purposes, it is easier to have share classes set up for their specific purpose (i.e. F shares for RIA's, A shares for RR's, R for retrimeent plans, etc.).  Generally speaking, I think load-based A share fund families are used for commission-based business, and the only time you get them at NAV is in specific situations (1mm breakpoint, RRep/employee account, etc.).  I think they COULD do what you are suggesting, but they just like to use them for their specific purpose.
Aug 11, 2008 4:36 pm

B24 - You know any EJ guys with sizable C share assets ? I know of one guy who has about 20% of his book in C shares, but most guys look at me like im an idiot when I bring it up.

Aug 12, 2008 8:39 am
iceco1d:
B24:

I agree with the B-share argument.  That's sort of a forgone conclusion in my mind.

 
Good question on the F-shares.  I think for processing and tracking purposes, it is easier to have share classes set up for their specific purpose (i.e. F shares for RIA's, A shares for RR's, R for retrimeent plans, etc.).  Generally speaking, I think load-based A share fund families are used for commission-based business, and the only time you get them at NAV is in specific situations (1mm breakpoint, RRep/employee account, etc.).  I think they COULD do what you are suggesting, but they just like to use them for their specific purpose.
 
On our platform, 80% of the funds available are load-waived A-shares, and not advisor share classes. 
 
I was referring specifically to AMF, but you are right.  On our platform, many of them are load-waved A's as well.
Aug 12, 2008 8:55 am
GT Key:

B24 - You know any EJ guys with sizable C share assets ? I know of one guy who has about 20% of his book in C shares, but most guys look at me like im an idiot when I bring it up.

 
GT,
First off, don't get bothered by what other Jones reps say.  It's the liquor kool-aide talking.  Most of them think that some of the Jones "rules" are also FINRA "rules."  I just wouldn't broadcast it too much.  Just do your own thing.
 
I have been using C shares for almost anything under 100K for a few reasons:
first, I can easily get into a really good portfolio of the funds I like without concern for staying in the preferred funds (I might use one AMF, but 3 or 4 other fund families).  I would love to do this for all amounts, but as you know, Jones DOES get bothered by C-share amounts over 250K (I rarely use C shares over 100K).
 
Second, it is such a disincentive to clients to get wacked with 4.5-5.75% upfront on an investment, thus the C-share focus on small amounts.  I don't think I have charged someone more than the 3.5% breakpoint in over a year.  It has been especially helpful in this type of market (uhhhh, doooooownnnnnn).  I have people that I invested a year ago that are now down the 3.5% PLUS whatever their portfolio is down from the market.  It will take years for the A shares to catch up with the C shares when you start in this type of market (although now that the market is "hopefully" bottomed, A shares might be more attractive).  I miss the days of making up that 3.5% load in 3 months.
 
I also use C shares (or R/retirement class) for business retirement accounts.
 
So, I don't know poeple specifically (at Jones) that have large C share businesses (I've also never really seeked them out).  My mentor brought a lot over from AGE when he came over (maybe $5mm), but he really only focuses on larger clients now (5 years w/Jones), so he is generally always above that 250K mark for C shares, so he uses A shares, MAP, and now Advisory for most clients.
 
My experience is that Jones will not bother you for sub-100K accounts.  You can use them for 100-250K, but you might need an Ack. Letter (not sure).
Aug 14, 2008 10:02 pm

B shares still exist? I don't think I have done one for 5-6 years!

Aug 16, 2008 9:13 pm

Anybody else have thoughts on what will happen with C shares?

Aug 16, 2008 9:16 pm
nestegg:

B shares still exist? I don't think I have done one for 5-6 years!





The only time I see B shares is when I ACAT in an account from a bank broker. I don't understand what the fascination is with B shares at banks. I also see a lot of local insurance salesmen using B shares. I rarely transfer in B shares from a wire.

Aug 21, 2008 12:42 am

I'd at least like to see more fund companies start doing the American Funds C share converts to A shares after 10 years.  Too bad they won't do it on 529 plans.  

Aug 21, 2008 9:52 am

Why would you WANT that?  It would simply encourage advisors to move to new fund families at 10 years.

Aug 21, 2008 10:47 am
B24:
nestegg:

B shares still exist? I don't think I have done one for 5-6 years!



The only time I see B shares is when I ACAT in an account from a bank broker. I don't understand what the fascination is with B shares at banks. I also see a lot of local insurance salesmen using B shares. I rarely transfer in B shares from a wire.

 
I think it has to do with the ability to tell clients that there aren't any commissions.  It's easier to sell something when there isn't any cost to the client involved. 
Aug 21, 2008 11:20 am

Yeah, banks can maintain that "we don't charge anything" mantra.  Sure, we'll give you .5% interest on your savings, but the account is free!  We'll give you 2.5% on your CD, but it's FREE!  Mutual Funds?  FREE!!!!!!  Yahoo!!!!!


I think the only bank that seems to be honest about this and actually give you good rates for free is ING Direct.  Granted, it's online only, and I've never read the "fine print" to see if their claims are true, but I get lots of mail and stuff from them with good rates (and some of my clients use them and like them).