C shares

Scorpio, the short answer is maybe.

I know that this sounds trite and hackneyed, but do what's in the clients' best interest, and you will prosper.  In many instances, C Shares are appropriate.  For example, small IRAs.  The client is getting hit for a $35 annual fee if the account is kept in house, and the addition of a 5 3/4% pop puts the client pretty well behind the 8 ball.

Tread softly, however.  If you're near (or expect at some point in the not-too-distant future to be near) a breakpoint, compliance is going to want to chat with you.  This, of course, is rarely good news.

As difficult as this sounds, try to keep your wits about you and not be pressured into anything you're not completely comfortable with.

Heed Starka's words.  he is a wise man!

Too....management often does have an agenda that is not in your best interests, especially if you're at a wirehouse!

Many broker/dealers won't allow "C" shares for long term investments.   They won't allow "C" shares as a way to annuitize your business.  You'll have to prove that they are the least expensive share class for your client.   You may have to use the SEC expense analyzer or something similar.

Starka, just because it is a small IRA, how does that make "C" shares better?  If the time horizon is long "A" shares are always going to be less expensive.  Also, if the account is small, that $35 becomes very large.  Isn't the client better off with the account being done straight with the fund company instead of a brokerage account? 

Would the client be better off at the fund?  Possibly, yes.  (When I take on an account that small, it's usually an accomodation, so I will as a rule pay the $35 out of pocket to keep the account under my thumb, so to speak.)

As to the C Shares for an account that small, run the comparison through one of the many "Fund Comparators" that are available.  You will see that if the client is making annual contributions, he/she is, in the beginning years, usally better off without the front load.  If, in fact, the account starts to get sizable, I want the client out of mutual funds anyway, so he/she makes out without paying the hefty 5.75%.

Are we really goiing to debate the appropriate way to handle the world's smallest accounts. It kills me how "A" share guys defend the "long term" approach, and how inexpensive that route is. Well.....not when your flipping your clients every 3 - 4 years. As someone said on here before. The "C"'s are only 75 bp more......and guess what....THAT'S HOW I GET PAID!!!. so take it or leave it. Go bust on the planner down the street who is putting 80 year old women in "B" share 2% wrap accounts......yea.....that happens.

Our team uses C share quite often. We employ a fee-based approach, and feel that C shares offer the most flexiblity. We gain access to the finest managers, and if they trip up for 12 months or 18 months, we have the freedom to reposition those monies in another option. Also, most of our clients puke when they are presented with the option of paying 3-5% upfront in A shares. The client is aware that they are paying slightly higher for the C share fleixiblity, and in most cases prefer that over the upfront ding of A’s or the back end cr$p associated with B’s.

C shares make lots of sense if you want the flexibility to switch fund families or if you'll be flipping the client every few years as the previous 2 posts alluded to.  My point is that a B/D won't allow their reps to use "C" shares as a way to annuitize their books.

I think what the regulators don't seem to realize is that although "A" shares are the cheapest in the long run, the lack of future compensation causes  brokers to either flip these accounts or to simply stop servicing them. 

We ARE using "c" shares to annuitize books. Jones seems to be the only firm with a "C" share problem. It's kind of pathetic, that it's ok to "re-allocate" an "A" share client every 3-4 years - (incurring a new sales charge of 5.75), but it's taboo to put 100 percent of a clients money to work in a share class that costs 75 bp's more.

The whole philosophy behind the "c" share advisor is much less greedy, and indicates an advisor is trying to build a practice. VS. the "A" share advisor who can appear to be in it for the buck.  

A couple of observations here: First, everyone assumes that that client pays the maximum sales charge of 5.75% on every dollar.  That charge drops to 4.50% at 50K, and American Funds even has a break at 25K.  But, let's just assume the client is going to pay the full boat on the load.  Then, go back to whichever mutual fund tool you use and run the Putnam Asset Allocation/Growth since inception (about 11 years).  Put 100k in there and miss the breakpoint.  Charge full price on 100K.  I like using this fund not because it is a favorite of mine, but because it represents a diversified asset allocation of small, medium, and large stocks.  Bonds, non-US assets, and cash, too.  Slightly lower than average expense ratio, and slightly better than average performance.  Now, run equal dollars amounts of A, B, and C shares.  There have been very few funds with 10-year or greater track records of C-shares, so investors don't really see the long-term cost of lost performance of those 75 little basis points. 

If you run this hypo, what you'll find is that your client paid 6600 extra dollars through lost performance so that you can "build your practice."  If you show them this, and they still value your objectivity, then great.  If you don't show them and they meet with me, chances are you'll be seeing an ACAT.  Your clients will find out the truth sooner or later.  Ask yourself, "When they know all of the facts, will I go up a notch in their eyes, or down a notch.?" 

I am not 100% anti-C-share.  I'm just not quick to buy into the C-share equals objective, A-share equals greedy bullsh*t.

Another observation:  If I show your client the service fees of your Putnam funds vs my models, you’ll see the ACAT.  You see, I can’t justify those fees to approximate the returns of the various indices.

Advisors who build a book a business on the premise of C shares are
asking for trouble.  The issue is both the level of fee’s and the
lack of disclosure to the client. 



Most reps choose C shares because they act like a fee based account
without having to have the fee discussion…this is wrong and the SEC
will stop it…period. 



The arguement of “well, I have the flexibility to move out to better
funds every 12 months or so…” is hogwash.  You don’t manage a
book that way, especially when the number of clients grow. 



Choosing a C share is a compensation and ease of sale issue, NOT a “flexibility” issue.  Be honest with yourselves.



“This is how I get paid?”  For those that feel this way, you
better change your tune.  Guess what…the regulatory bodies that
control our lives DO NOT CARE “HOW YOU GET PAID”!   Especially when your choice of compensation is not visibly disclosed to those that are paying you!



We can fight this all
day long but it is coming.  There will be reps that have $150 mil
books of C share portfolios that will find themselves getting one
giagantic pay cut…soon.  Go in a direction of full, visible
disclosure of fee’s charged.  25 years ago spreads were 5 points,
loads were 8%, and stock brokers were respected…things change so you
better change as well.

I agree with Rightway, and in fact, I’ll suggest going even further.  I think that the day is coming that A Share funds will be sold with even lower commissions and trails will be discontinued.  After all, why should a trail be paid?  It’s not paid for stocks and bonds, and I think the regulators will make this case, without much of a fight from the fund companies.

Sooth - Do you include in your hypo, the cost of moving  your client from ICA, to comstock after year 3? There is no doubt that A share costs are generally less expensive over the long run. IT"S A MOOT POINT! because a lot of advisors who use "A" shares trade these clients after a couple of years..........maybe not you, but....tell me how a Jones guy who has net 0 new assetts for 2-3 years continues to do $30,000 -$40,000 gross per month???

And since when are we trying to be the lowest cost brokers?? If I am going to use "C" shares with a client, I explain the options of A, B & C, then I fully explain why I suggest "C"....They are well aware that the cost is 75 BP"S more, and it is disclosed by me, and the prospectus.

Don’t forget that the front end load is part of the equation. Just read a fact sheet on Mutual Discovery and the difference in 10 yr performance with sales charges deducted is FOUR BASIS POINTS. Ask your clients which way they want to go. I have YET to have anyone say give me that there front load thing. It isn’t 75 bps/yr., it’s the NET result after ALL charges. 

The bottom line is...You are going to have prospects who are ok paying fees of 1 1/2 % per year, and understand that they will be invoiced for that amount. And, you are going to have clients that would rather not see a fee. I need to recognize which is which......not try to convert a prospect's view on paying for service. The very successful people I have seen in this business....Play into the clients comfort zone. If you are ethical and do what's right for clients, you can make them money using different processes, but you don't want to be so inflexible that you lose the sale. 

Rightway, great response!  This isn't about right or wrong.  It's simply a fact that most B/Ds won't allow C shares to be used anymore for long term investors.

IMO, the problem is that the regulators are tying to do what is cheapest for the client and not what is best for them.  We can all be in agreement that A shares are the cheapest for the long term investor in theory, but not necessarily the best in practice.  If a client buys an A share, often the broker will change investments to earn a commission or the client simply won't consider to receive the service that they deserve because the broker doesn't earn enough compensation to provide the service.

I would love to see a system where A, B, and C were eliminated and there was just one share class.  It would pay 1% upfront and 1% annual.  Clients would get service and there would be no incentive to change investments simply to generate commissions.

[quote=anonymous]

Many broker/dealers won't allow "C" shares for long term investments.   [/quote]

A wise thing considering the fact that the regulators, correctly or not,  consider ALL mutual fund investments to be long term.

[quote=moneyadvisor]

 It's kind of pathetic, that it's ok to "re-allocate" an "A" share client every 3-4 years - (incurring a new sales charge of 5.75), ...[/quote]

I can't speak for the whole industry, but where I am doing what you suggest above will get you a very close encounter with someone from compliance.

Anonymous - That’s not such a bad idea - one share class… Years ago, the cost for trades was exactly the same from firm to firm. One thing is for sure…if you like change and controversy…this is a dream job!

[quote=Starka]Another observation:  If I show your client the service fees of your Putnam funds vs my models, you'll see the ACAT.  You see, I can't justify those fees to approximate the returns of the various indices.[/quote]

Again, I am not suggesting that fund.  What I am suggesting is there are precious few mutual funds where you can run a side by side comparison of A, B, and C shares over an extended period of time.  I like demonstrating the effects of C-share fees through good and bad markets, stocks and bonds significantly outperforming one another, and foreign assets outperforming US and vice-versa.  In other words, I am not stacking the deck to make my point.  If you lost money for the entire 10 years and paid the load, B and C shares look great.  If you shoot the lights out in years 1 and 2 you overcome the load much more quickly.  I try to set realistic expectations with slightly below average fees and slightly above average performance while illustrating C-share fees over a time horizon of greater than 10 years.  I do not encourage clients to buy this fund.  I only use it for a useful set of talking points about fees.

[quote=rightway]Advisors who build a book a business on the premise of C shares are asking for trouble.  The issue is both the level of fee's and the lack of disclosure to the client. 

Most reps choose C shares because they act like a fee based account without having to have the fee discussion...this is wrong and the SEC will stop it....period. 

The arguement of "well, I have the flexibility to move out to better funds every 12 months or so..." is hogwash.  You don't manage a book that way, especially when the number of clients grow. 

Choosing a C share is a compensation and ease of sale issue, NOT a "flexibility" issue.  Be honest with yourselves.

"This is how I get paid?"  For those that feel this way, you better change your tune.  Guess what....the regulatory bodies that control our lives DO NOT CARE "HOW YOU GET PAID"!   Especially when your choice of compensation is not visibly disclosed to those that are paying you!

We can fight this all day long but it is coming.  There will be reps that have $150 mil books of C share portfolios that will find themselves getting one giagantic pay cut...soon.  Go in a direction of full, visible disclosure of fee's charged.  25 years ago spreads were 5 points, loads were 8%, and stock brokers were respected...things change so you better change as well.
[/quote]

Rightway--

Easily the best post on this forum in probably 60 days or more.  You laid out the issue exactly as it exists, and then nailed the truth.  Very, very well said.

Well....excuse me for not standing in line to kiss Rightway's ass....It's not so much the content, but the delivery. Yea......we use "c" shares among other things. There are parameters....and WHEN things change, I imagine we'll change also.  C share details are disclosed at point of sale and in the prospectus, so... I am compliant.  

Anonymous ....you don't flip "C" shares........that's the whole point of the trail....( I personally do not "flip" anything).  

"Long term investor" - It's broker folklore. I know what the term means, I don't see it in practice. It's very debatable...but I think it's a dead concept, leaving investors with marginalized returns. Besides If a client was going to employ a "Buy and Hold" strategy,......why would they need us?

As far as C shares being an "ease of sale issue", it's a ridiculous statement. Of the components inside client accounts, funds have performed phenomonally well. And, we are 3-5 % points ahead of the A share option.

For the record, I am happy to use other types of fee based programs, if my prospect is on board with me. But, I sure as hell am not going to lose opening an account, if I know the guy would be happier with C share mutual funds.  

[quote=moneyadvisor]

Well…excuse me for not standing in line to
kiss Rightway’s ass…It’s not so much the content, but the
delivery. Yea…we use “c” shares among other
things. There are parameters…and WHEN things change, I
imagine we’ll change also.  C share details are disclosed at point
of sale and in the prospectus, so… I am compliant.  

Anonymous ....you don't flip "C" shares........that's the whole point of the trail....( I personally do not "flip" anything).  

"Long term investor" - It's broker folklore. I know what the term means, I don't see it in practice. It's very debatable...but I think it's a dead concept, leaving investors with marginalized returns. Besides If a client was going to employ a "Buy and Hold" strategy,......why would they need us?

As far as C shares being an "ease of sale issue", it's a ridiculous statement. Of the components inside client accounts, funds have performed phenomonally well. And, we are 3-5 % points ahead of the A share option.

For the record, I am happy to use other types of fee based programs, if my prospect is on board with me. But, I sure as hell am not going to lose opening an account, if I know the guy would be happier with C share mutual funds.  

[quote=moneyadvisor]

"Long term investor" - It's broker folklore. I know what the term means, I don't see it in practice. [/quote]

Well, it isn't folklore to the regulators. They explictly say that mutual funds are a longer term investment. As to your claim that, these days, brokers flip folks regularly out of one A share fund family to another, picking up another load based commission, that's folklore as far as I'm concerned.

"As to your claim that, these days, brokers flip folks regularly out of one A share fund family to another, picking up another load based commission, that's folklore as far as I'm concerned."

Of the past 6 prospects I have met with, they would probably disagree. The acitvity runs across annuities ( every 6 years) or funds ( every 18 months) or equities ( monthly), it STILL happens all the time. Of the 6, 4 are now clients, 1 is still on the fence, and 1 was a shmuck and I didnt want him.

ok…i’m wrong…Have a good weekend all!

[quote=blarmston]

"As to your claim that, these days, brokers flip folks regularly out of one A share fund family to another, picking up another load based commission, that's folklore as far as I'm concerned."

Of the past 6 prospects I have met with, they would probably disagree. The acitvity runs across annuities ( every 6 years) or funds ( every 18 months) or equities ( monthly), it STILL happens all the time. Of the 6, 4 are now clients, 1 is still on the fence, and 1 was a shmuck and I didnt want him.

[/quote]

What compliance department allows people to flip funds and pick up a load based commission every 18 months? Dewey, Cheatham and Howe?

Seriously, the equities thing every month could have good cause, the annuities every 6 years could be fishy or it could be reasonable given features available on new annuites (and if the 1035 doesn't require some pretty high-level management sign-off for suitability I'd be shocked) but funds swapping? If the firm allowing that is publically traded, I'd short it, right now.

Not to call out firms because I have seen it happen at every firm, but recently I got a client from AMEX who had about 300K in various funds. The FA was moving him out of A shares every 21 months into another fund family and was not giving him breakpoints. The FA was only moving about 40K at a time, but this was on a rolling basis and was being done for the past 4 years or so ( maybe longer but the client only had statements going back that far)… Needless to say the client has moved about 280K ( 20K were JUST purchased and are actually decent funds so we transferred in kind), and when he leaves his employer at the end of this year, is moving about 460K from his 401K ( which is being manged bythe AMEX FA team as well…). Not a bad account, and with the referral potential it could be huge ( client has 17 years with his firm and knows everyone from Executive to lowly)…

[quote=blarmston]Not to call out firms because I have seen it happen at every firm,...

[/quote]

You're among friends here, feel free to name the firms with compliance departments so asleep that they would allow this.

 [quote=blarmston]

but recently I got a client from AMEX who had about 300K in various funds. The FA was moving him out of A shares every 21 months into another fund family and was not giving him breakpoints. [/quote]

And you're sure this wasn't a load waived account? Because on the face of it, this AMEX guy was getting away with the very sort of thing the regulators have been watching very, very closely for about the last two years, at least.

By the way....nobody here is advocating swapping mutual funds. To discuss it, does'nt mean we do it. And as my friend Rightway said, you could beat this topic to death! But, when guys start debating A shares and c shares, using hypotheticals based on 15  - 20 year holding periods.....it's kind of a joke. (Do I have to explain why?) 

Additionaly, not all funds are suppose to be held long term. Who out there has clients in Real Estate funds, that have made good gains for your clients over the last 2 1/2 years........Iv'e been pulling profits from these, as well as Natural Resource funds. In both cases, am using the same fund families - doing exchanges.

I also think using one fund family for breakpoints is dumb. Are you telling me that I should invest all my clients money in one fund family, even though they only excell in managing Mid Cap Value. I should subject the client to mediocre performance in other areas, in exchange for the cheapest method possible???? Why would I be killing myself studying this industry, educating myself on managing money for people, if at the end of the day - we decide to put it all in "A" shares becuase it's cheaper?? I simply like the flexibility of C shares for that reason.....I am fully aware of the boundaries concerning compliance - and work within them.  

For those of you that have your panties in a bunch, regarding compliance and the use of “C” shares. The deal at ML is up to 1 Million bucks per household (not in one fund family). This covers my needs in most cases.

[quote=moneyadvisor]

By the way…nobody here is advocating
swapping mutual funds. To discuss it, does’nt mean we do it. And as my
friend Rightway said, you could beat this topic to death! But, when
guys start debating A shares and c shares, using hypotheticals
based on 15  - 20 year holding periods…it’s kind of a joke.
(Do I have to explain why?) 

Additionaly, not all funds are suppose to be held long term. Who out there has clients in Real Estate funds, that have made good gains for your clients over the last 2 1/2 years........Iv'e been pulling profits from these, as well as Natural Resource funds. In both cases, am using the same fund families - doing exchanges.

I also think using one fund family for breakpoints is dumb. Are you telling me that I should invest all my clients money in one fund family, even though they only excell in managing Mid Cap Value. I should subject the client to mediocre performance in other areas, in exchange for the cheapest method possible???? Why would I be killing myself studying this industry, educating myself on managing money for people, if at the end of the day - we decide to put it all in "A" shares becuase it's cheaper?? I simply like the flexibility of C shares for that reason.....I am fully aware of the boundaries concerning compliance - and work within them.  

RW - If you are talking about employing a process, and following a service model that justifies an ongoing fee, these two elements have to exist. Not only to keep a book of business scalable, but to obtain max performance,......so we can get new clients, and yes... to protect ourselves in the face of the regulators.

I honestly don't know what is going to be, or not be under fire in comming years, other than from updates I get from the firm regarding current concerns. I am fully aware that it does not matter what "I" think......and yes there are land mines we can avoid, but this business changes so frk'n often as it is. My business today, could look very different 10 years from now. Who knows what the next bug up some authorities ass is going to result in!?!?!? There are so many other much worse offenses out there, other than advisors using "C" shares. .....The whole thing just makes me a little crazy.

Enjoy your cocktail.

The sum of all fears lies in what motivates legislators and regulators.  Is it a genuine concern for investors?  No.  The driving force is that they all want to make a splash.  The easiest way to do this is to find some new “abuse” in our industry, with no thought as to how their rules and regs can kill the goose that laid the golden egg.  They won’t be happy until we’re all working for $7/hour, and taking personal responsibility for market losses.

Scorpio - after re visiting your original post, I have to add........The purpose of C shares should not be interpreted as "the idea of getting paid, to do nothing more than monitor performance". You still have work to do......the ongoing fee you get in your clients C share mutual fund portfolio, covers the cost of your service (I honest think a bigger arguement could be made against A share advisors taking fat commissions, and then abandoning clients). You will need to make adjustments to this portfolio annually if not more. It's what keeps you incented to continue contact with your client. To call them when there is nothing to sell. Yeah it's about monitoring there portfolio.....but also knowing when they have a grandchild, or their wife goes in for surgery. It's those conversations that will create stickiness.....not the free credit card you send them.

Rightway.....after re reading the OP, I now think I understand the motivation behind your posts.

echoing some past sentiments that is why I like using a mutual fund wrap program.

since it's considered an "investment advisory" product requiring a 65 to present I am required by my firm  to have, at the very least,  an annual meeting with my clients.   This has to be documented and forwarded to my compliance department.

If anything it will increase the "stickiness" of my relationships, similar to using C shares.

Since my clients also get automatic rebalancing, quarterly performance reports, client newsletters, etc. for their fees I am hoping that I can avoid any regulators questioning my advisory fees in the future.

Scrim