Mutual Fund Fees

  A client and I were talking and the conversation turned to mutual fund service fees and commissions. She wanted to know how they worked.

A while later I thought I’ve never written a blog about this subject and I figure this is as good time as any. The SEC is currently holding hearings on mutual fund fee and expenses and these changes will impact all investors.

Here are the basics. There are load, no-load and load waived mutual funds. No-load funds are purchased direct from the no-load fund company or from a planner or representative in a fee for service account. There are also fund supermarkets where you can purchase no-load and load funds but there are fees associated with the purchase that are not added on if bought direct from the mutual fund company. You can also purchase load funds in a fee account and the commission is waived. There is no commission discount if an investor buys direct from a load mutual fund company.

Confusing?

When I started in the business it was all pretty basic. There was one commission schedule for load funds that started at 8 1/2% plus there were the no-load mutual funds such as Vanguard and most of the offerings from Fidelity. (Yes, dear reader, Fidelity, had load mutual funds including their flag ship Magellan Fund.) Today there are a variety of fund classes to denote how the broker/dealer is compensated. The basic share classes are labeled A, B and C.

A-shares have a front end commission. The maximum commission today is 5 3/4% ( for equity funds and less up-front for bond funds) and this amount reduces based on the amount of money invested. At one-million dollars invested with one family of funds there is no front-end sales charge. The important thing to remember is the assets have to be with One Family (one mutual fund company) and not with several mutual fund firms. Investors may also receive commission reductions if they agree to an additional purchase that hit certain dollar breakpoints over the coming thirteen months. Those breakpoints for commission reductions are generally at: $10,000; $25,000'; $100,000; $250,000 and $500,000.

B-shares are almost extinct as regulators have curtailed their use believing representatives were misusing the product. The B-share was popular with investors with no up-front sales charge and a higher service fee. B-shares usually converted to A shares after the account had been open for 7-years. The higher expense charge that compensated the broker/dealer then reduced to what the A shares were charging. C-shares have no up-front fee and after 13 months no redemption fee. There is a higher 12b1 fee that compensates the broker/dealer and registered representative.

All funds, load, no-load and load waived funds have expense fees. Simply because a mutual fund is a no load or load waived fund does not mean it does not charge what is called an expense ratio. Mutual fund firms exist to make money and they charge a fee to compensate the fund managers, service desk, technology department, mailing, printing, advertising, research, brokerage fees, shareholders and the like. This fee is call an expense ratio.

In addition to the expense ratio and illustrated separately many fund firms also charge a 12b1 fee which pays the broker/dealer and ultimately the registered representative for servicing the client account.

Not all mutual funds charge a 12b1 fee and in a few years this too will be modified if the SEC has anything to say about it. The Securities and Exchange Commission is working hard at having the fee disappear over the next few years. No one knows for sure but something will replace the 12b1 or the fund company will add a fee commensurate with the cost of the current 12b1. There is discussion that `12b2’ will replace 12b1. The fee will remain but vanish after a number of years.

The handwriting is clear that the regulators want to (1) reduce compensation to servicing broker/dealers and representatives; (2) have given little thought to the future cost of servicing customer accounts; (3) no one has discussed the actuality of higher fees arising out of regulatory reducing costs to the investors. (4) Regulations will force the small investor from finding and working with a professional advisor.

All the above commissions and breakpoints along with expenses can be found and read in any mutual fund prospectus. Hopefully this helps and if anyone has questions please call or write: pstanley@westminsterfinancial.com or call 877 783 7080. Share this with someone who cares about their money.