A shares vs. C shares
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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?
My humble opinion only:
A shares - numbers make sense if you are going to hold long term- [email protected]!!!!!!...........
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.
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
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.
[quote=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.
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.