C shares

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Oct 4, 2005 3:04 am

Are C shares really the hot ticket?  I’m not in production yet so
I’m asking your opinion.  Management is pushing annuitized assets
hard, and I like the idea of continuously getting paid to do nothing
more than monitor performance, but the trails dont start for about a
year after you open the account.  IF for whatever reason I’m not
around at that point, I basically made nothing off of opening that
account right?  But the house will make money on that forever if I
dont move the account.  I’m not assuming I’ll fail out of here,
just trying to see if management has a hidden agenda up their
sleeve.  That would be a pretty nice scam…get all the new guys
opening C shares, give them the axe, and then get paid $$$   

Oct 4, 2005 3:19 am

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.

Oct 4, 2005 4:04 am

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!

Oct 4, 2005 11:32 am

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? 

Oct 4, 2005 11:55 am

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%.

Oct 4, 2005 12:23 pm

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.

Oct 4, 2005 2:52 pm

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.

Oct 4, 2005 5:33 pm

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. 

Oct 4, 2005 6:36 pm

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.  

Oct 5, 2005 2:42 am

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.

Oct 5, 2005 3:01 am

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.

Oct 5, 2005 12:19 pm

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.

Oct 5, 2005 12:23 pm

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.

Oct 5, 2005 12:47 pm

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.

Oct 5, 2005 1:26 pm

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. 

Oct 5, 2005 2:52 pm

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. 

Oct 5, 2005 6:25 pm

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.

Oct 5, 2005 6:53 pm


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.

Oct 5, 2005 6:57 pm


 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.

Oct 5, 2005 7:44 pm

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!