A shares vs. C shares

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Apr 23, 2007 10:19 pm

For those of you who  believe in using one or the other, what's your thoughts on placing clients in c shares? Even if they are LT investors, does the benefit of having the ability to move within the first 7-8 years outweigh the 12b1s on As every quarter? 

Apr 23, 2007 10:26 pm

My humble opinion only:


A shares - numbers make sense if you are going to hold long term- HOWEVER@!!!!!!...........


Long term is a long time. Fund families blow up (Putnam) , they grow too big (AF?) Clients lives and needs change. For these reasons, I believe that C shares almost always (if not always) make the most sense. Most flexibility, and 100% of the money to work from day one.


Also, not to say this is right, but the fact is that if FA's are getting 1% trail, they will tend to want the assets to stick, and therefore, service the client better. Again, this is not always the case, and its certainly not right, but its a fact of life most of the time.

Apr 23, 2007 11:43 pm

Okay children, gather around, I have a little history to share with you.



When I started in this business, roughly 90% of all mutual funds were

available only as an A-share. Incredible you might wonder? Yes, not only

that, but the front-end loads were as high as 8.50%. How can this be? You

must be wondering how difficult it must have been to be a broker?

Imagine, making in one ticket what many of you take 8 years to make in

today's C-share.



Things were simpler then. Breakpoints mattered. There was an incentive

for the client to make a larger investment. If the historical return for the

market was 8-10%, then the client broke even after the first year and

enjoyed reasonable management fees thereafter.



Then No-load shares began to appear in the late '80s and by the early

'90s, all the big mutual fund companies introduced B-shares. B-shares

give you the impression of a no-load fund. The mutual fund companies

would get loans to pay the brokerage firms and in turn had to raise the

management fees enough to cover the interest expense on the loans. If

the client wanted to leave prior to 6 years, they would take the hit on the

way out. What happened then was that many abused the breakpoint rules.



In comparing the Class A and Class C share options, the primary

academic criticism of Class C shares is that they are more expensive for

long-term investors. This assertion is usually supported by illustrations

of the effect of compounding over long periods of time, which show that

a one percent difference in expense ratios between otherwise identical

mutual funds can lead to significant differences in wealth accumulation

over periods of 20 or 30 years.



A second criticism of Class C versus Class A shares involves the

application of breakpoints for volume purchases. For investors with

significant sums to invest, purchasing A shares in a single fund family

would likely result in significantly lower investment costs than C shares,

which do not offer any form of volume discount.



That's it for now. We can discuss it some more tomorrow. Good nite.

Apr 24, 2007 12:43 am
skeedaddy2:

Okay children, gather around, I have a little history to share with you.


 





Other than explosive fund families, there is also the issue that most
fund families aren't good in every area. So A-shares discourage good
investment allocation. However the intial comission is a sunk cost, so
I wouldn't worry about it too much



C-shares are just plain expensive, with many of them costing upwards of
2% all in. But you have some flexability after the CDSC expires.



These are all obsolete as the future is wrap programs of various types.

Apr 24, 2007 7:46 am

 For those of you who  believe in using one or the other, what's your thoughts on placing clients in c shares? Even if they are LT investors, does the benefit of having the ability to move within the first 7-8 years outweigh the 12b1s on As every quarter?


I don't like "A" shares.  My primary reason is that I can't afford to service the account which is ultimately bad for the client despite the fact that they are the cheapest way to invest with me for a buy and hold investor.  The issue that you will have to deal with in using "C" shares for long term accounts is getting your Broker-Dealer to allow you to use a "C" share.