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Load
A transaction fee paid to an advisor based on the mutual fund recommended and purchased. They differ based on the “share class” of the fund, as well as from fund family to fund family. This means the broker’s income will be higher if you purchase certain funds compared to others, based on the fee structure.
Typically the Class A share charges a load upfront, which varies but averaged 5.3% in 2007 for a stock fund (ICI Factbook 2008). Using that average, this means that of a $10,000 investment, only $9,497 is actually invested in the fund. The other $503 ($9,497 x 5.3%) is paid as a sales charge. This share class usually has the lowest annual expenses, however, which make it more attractive the longer the investor holds it. Also, the load may be reduced if the investment is large enough to qualify for “breakpoints,” which vary but commonly begin at $25,000. This is the least suitable share class for short-term investments.
Class B shares would invest the full $10,000, but would then deduct a fee upon the sale. This “contingent deferred sales charge” would vary depending on how long the shares were held, usually disappearing after about 6 years. In the meantime, the B shares would charge a higher annual expense ratio than the Class A shares, because of 12b- 1 fees. The B shares typically convert to A shares a few years after the redemption fee period ends, lowering annual costs at that time. B shares generally are the best share class for medium-term holding periods of several years.
Class C shares are similar to B shares, with a shorter redemption fee period (usually 1 year) and higher annual expenses. This is the share class most suited to short- term investments, and least suited to very long-term holding periods.
There are additional disadvantages to sales charges, besides the cost itself. If the fund is performing poorly, you may want to change investment choices or strategy. In selling your fund shares, you will not get back any of the Class A front-end load, and may pay a high back-end load on Class B shares. You may then pay yet another front-end load, or restart the clock on new B shares, depending on the new investment choice. These sales charges reduce your flexibility to adjust your portfolio, in addition to eating into returns.
For more information on mutual fund fees, check out the Investment Company Institute’s Investor Awareness series.
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