Fund Loads: Pick Your Poison

by Alan Lavine and Gail Liberman

When you invest in mutual funds through a broker or financial adviser, you may have a choice on how to pay your “loads” or commissions.

Be sure to investigate your options.

How to choose? Morningstar Inc., Chicago, in a recent study, offered up some suggestions.

Your first step is to understand your “share class” options.

Typically, there are:

 “A” share classes, which levy the sales charge upfront. You often pay about 4.5 percent. But have more than $50,000 to invest? In that case, you may pay less due to “breakpoints” that reward larger investors with lower commissions.

“B” shares typically have no front-end sales charges or breakpoints, but a contingent deferred sales charge that declines over time. “B” shares also have higher annual ongoing expenses than “A” shares. Most B shares convert to lower-expense “A” share after seven or eight years.

“C” shares have no front-end sales charges and typically have a small back-end exit charge during the first year. But unlike, “B” shares, “C” shares don’t typically convert to lower-expense “A” shares.

Yes, it’s possible that your financial adviser or broker offers a combination of these types of fees. But here’s the bottom line, according to Morningstar.

“A” shares generally are best for investors who don’t know how long they plan to invest and have enough money to reach a lower-fee breakpoint. “B” shares often are a better choice for small investors who aren’t investing enough to hit a breakpoint and don’t know how long they’ll invest.

“B” shares typically outperform “A” shares over the short term and “C” shares over the long term, net of expenses.

“C” shares are best for those who invest for three years or less. Under those circumstances, they outperform “A” shares even with a break point, as well as “B” shares.

• There is no clear-cut winner for those investing for four to seven years.
• “A” shares are the best choice for those who invest for at least eight years, but “B” shares may perform better for those with $50,000 or less to invest.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "Rags To Retirement," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show. Al and Gail’s new book is "Rags To Retirement:  Stories from people who retired well on much less than you think," published by Alpha Books.

More articles by Al and Gail can be found here.