C Shares in Retirement Accounts

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Dec 19, 2006 11:17 am

Recently, several people have said that they are having problems with their compliance department allowing C shares in retirement accounts.  Could you be more specific?  Please no debate about C shares vs. A shares, we all passed the Series 7.  Each has their own benefits.  I am most interested in why your Compliance Department (a.k.a. The Sales Prevention Department) is giving you hassles.

Dec 19, 2006 11:35 am

Because C shares are typically for shorter term investing.  Since retirement accounts are typically for long-term investing....you see the disconnect?  If you pick the right mutual funds, and you are investing for a goal many years off, most of your "work" is done for the time being (other than periodic re-bal.).  Now, this is not always the case, but I think that is more or less how the theory goes.  If I were completely neutral, I would agree that A-shares make sense in these cases.  However, it would be nice to collect 1% gross every year on every mutual fund...


I assume you knew this already based on your comments, so not sure if I answered your question completely. 

Dec 19, 2006 11:50 am

Well that's about right. The problem with the logic is a problem that one understands if they use C shares--So many funds tank after a few years that a switch to another firm is necessary thus paying loads on A all over again.

Dec 19, 2006 1:23 pm

Look, you can make a very good agrument to use C shares or B shares for that matter.  Open your American Funds book and look at expenses and performance over time.  Some people just don't want to lose that 5.75 off the top, they want all of their money in the market.


Some people don't want to have to stay with a fund company for 5 years, they want more liquidity, even in an IRA than an A share provides.


I asked if you were specifically having this problem with your compliance department, those are the people I would like to hear from.

Dec 19, 2006 8:14 pm
Moneytree:

Well that's about right. The problem with the logic is a problem that one understands if they use C shares--So many funds tank after a few years that a switch to another firm is necessary thus paying loads on A all over again.



Fund families do not charge a load when transferring from one fund to another, as long as it's within the same family of funds.  That's one of the things that Spitzer recently nailed a bunch of firms for.  These guys were switching funds for their clients and charging the client the loads all over again. 

Dec 19, 2006 8:36 pm

V-



At Jones, you can use them up to about 100K without too many problems.

Once you start hitting decent breakpoints, they pretty much force you to

use A shares. Above that amount, you really have to get an

acknowledgement letter signed by the client.

Dec 19, 2006 9:42 pm

From what I can gather here at Jones the firm has been Pro A share so long for whatever reasons that they just don't like you doing C shares.  They "allow" it under certain circumstances, but their philosophy with retirement accounts is that the time horizon is so long that A shares rule!!!!  You always hear the old, "At jones the average mutual fund is held for 10-14 years"  which sounds made up to me.  Like noted above, you can use them under certain dollar amts.  On a related note I tried to do a new C share fund in a Simple account for an American fund, and they (American) have completely disallowed C shares in Simple and SEP IRAs unless the fund is already owned in the account.  

Dec 19, 2006 10:04 pm

"A" shares are cheaper than "C" shares in the long run.  When it is put on the investor account form that the investment is long term, it should raise a red flag whenever a "C" share is sold.  That being said, this does not mean that "C" should not be allowed to use.  Somehow, you must get your compliance department to understand that the account is long term, but the specific investment is short term. 


It makes much more sense to completely disallow "C" shares in accounts held at fund families because as long as the account is open, they can move money without sales charges.  In a brokerage account money can be moved between fund familes, thus creating sales charges, so that "C" shares may be cheaper than "A" shares.

Dec 19, 2006 10:24 pm
vbrainy:

Recently, several people have said that they are having problems with their compliance department allowing C shares in retirement accounts.  Could you be more specific?  Please no debate about C shares vs. A shares, we all passed the Series 7.  Each has their own benefits.  I am most interested in why your Compliance Department (a.k.a. The Sales Prevention Department) is giving you hassles.




It's amazing the cr&p that the compliance folks and regulators are messing around with, while there are still plenty of real crooks out there......some clients just don't want to pay a sales charge.

If it's going to come down to this, I wish the fund companies would just ban C-shares all together so clients didn't even have a choice.

Dec 19, 2006 10:29 pm

Actually, I'd like fund companies to ban "A" shares.  I can't stand the fact that they are the cheapest long term, but they put brokers in the position that the broker can't afford to service the client.


The broker can go broke servicing the client or they can churn the account.  It sucks either way.  (Or they can ignore "A" share clients.)

Dec 19, 2006 10:34 pm

At my firm we use A and F shares in our fee based program.


Compliance doesn't give us hassles.....yet!


scrim

Dec 19, 2006 11:43 pm

Look, the bottom line is, even if C shares were cheaper, the compliance gripe is that when C shares are sold (and we all know this), cost is rarely discussed, disclosed, etc.. with the client because they never see it come out! Compliance departments realize that a rep with a history or pattern of C shares over time frequently proves to be misleading his clients to believe he works for free. Period.

Dec 19, 2006 11:59 pm

Free?  That could be a little extreme.  Separate from the fact that I ALWAYS disclose the fees to the clients, I have a hard time believing that any clients actually believe that we work for non profit companies.

Dec 20, 2006 6:58 am

Frogger, your analysis is B.S.  If on the investor account form, you put that the time horizon is short term, the account will get flagged if it is an "A" share.  If on the investor account form, you put that the time horizon is long term, the account will get flagged if it is a "C" share.


It is as simple as that.

Dec 20, 2006 11:12 am
gad12:

Free?  That could be a little
extreme.  Separate from the fact that I ALWAYS disclose the
fees to the clients, I have a hard time believing that any clients
actually believe that we work for non profit companies.





Don't be so sure. Alot of people think this is a like a bank, and that we work for "free".

Dec 20, 2006 11:34 am

Someone else said it but the bottom line is that there are numerous people that out right refuse to pay a front load fee.  I have tried everything including a software program that shows people how much more expensive the C share is after 4+ years...but they refuse to buy the A.  I always give clients the choice & oddly enough more than 75% of my fund tickets end up in C's.


There are some broker dealers out there that are now limiting the amount of money a rep can put into C's given the break points. After 500k AGE will not accept a C ticket for that household within the same fund family. At a million, you are screwed regardless of how many fund family's you use. Didn't Merrill outlaw the C in most cases?

Dec 20, 2006 12:04 pm
Broker24:

V-

At Jones, you can use them up to about 100K without too many problems.
Once you start hitting decent breakpoints, they pretty much force you to
use A shares. Above that amount, you really have to get an
acknowledgement letter signed by the client.



now that is good input.  But I did not think you could sell anything beside A shares at EDJ.  Am I wrong?

Dec 20, 2006 12:07 pm
anonymous:

"A" shares are cheaper than "C" shares in the long run.  When it is put on the investor account form that the investment is long term, it should raise a red flag whenever a "C" share is sold.  That being said, this does not mean that "C" should not be allowed to use.  Somehow, you must get your compliance department to understand that the account is long term, but the specific investment is short term. 


It makes much more sense to completely disallow "C" shares in accounts held at fund families because as long as the account is open, they can move money without sales charges.  In a brokerage account money can be moved between fund familes, thus creating sales charges, so that "C" shares may be cheaper than "A" shares.



You are an idiot.  Do you know how many clients have been poorly served by brokers who sold A shares, took the upfront comission, and NEVER called the client again? 


Retirement is 30 years.  When you use C shares, as the client account grows, you also get paid more.


It makes you have continued interest in the client and to serve their best interest.  Re balance.  Re allocate.


Who wants to serve a bunch of A share clients---NOONE

Dec 20, 2006 12:47 pm

V-


You can sell C shares at Jones, you just have to follow the policies they have in place.  They will not give you too much hassle if you are doing them in small accounts.  They may send a compliance response request (we call it an F.S. PEND), but you just explain that the client has small dollars, no breakpoint, and prefers not to pay the upfront load.  If you are telling the truth, you have nothing to worry about.  They just make sure we are asking the right questions and doing it for the right reasons.

Dec 20, 2006 2:56 pm

OK Broker 24.  Have a prosperous day.