In upcoming lessons of this course we will deal almost exclusively with “no-load” funds. If you are willing to find and analyze funds for your portfolio using the knowledge and resources you gain in this course then there is no reason to pay a sales commission to a third party for giving you recommendations. However, some of you, for convenience sake, may still want to buy funds from a commissioned broker or advisor who earns a living by selling them. If so, you must understand fund “classes”.

Sellers of “load” funds will typically present you with a choice of three fund “classes” to consider. These will be A shares, B shares or C shares. The following descriptions of these fund classes are typical in the industry although the numbers for any one specific fund may vary.

Class A Funds: These are funds that charge you a front-end sales load. The fund’s sales charge is typically taken out of your initial investment when you purchase the fund shares. So if you buy $10,000 worth of “A” shares in a fund that carries a 3% load then you immediately pay a $300 commission and your investment is $9,700 in the fund. You will then pay a 12b-1 fee (a fund's sales and marketing expense as discussed in the previous topic) annually that is typically on the order of .25%. You pay this fee for as long as you hold the fund.

Class B Funds: These fund shares usually carry deferred loads, often referred to as back-end loads. With these funds you don’t pay a sales charge until you sell the fund and typically the sales charge declines each year. For example, you may pay 5% of your investment if you sell the fund in year one and 1% if you sell in year 5. After year 5 you can sell at no charge. However, your annual 12b-1 fee is typically higher than A shares and is often 1% per year for the initial holding period, e.g. 5 years. After the initial holding period B shares revert to A shares with a lower annual 12b-1 fee, e.g. .25%.

Class C Funds: This class of shares charges no initial load and there is typically no back-end commission if you hold the fund for over a year. If you sell early you could face a 1% charge. But with C shares you are faced with a 12b-1 annual fee that is typically 1% per year and never declines, as is the case with B shares.

So, which class is best? If you decide to work with “load” funds then consider the following: Favor A shares if you are a longer-term investor as the initial commission “hit” will gradually erode over time and the annual fees that last as long as you hold the fund are lower. Favor C shares if you think you will sell in a short timeframe, e.g. 1 to 3 years. There is no front or back-end commission and you will only have to tolerate the high 12b-1 commission fee for a short time. What about B shares? Frankly, we can’t think of any good reason to buy them.

Unscrupulous brokers will often flog B and C shares as being “no-load” or having “no initial sales commission”. Don’t be fooled. You know that the trade-off for there not being an initial load is a higher annual sales commission (in the form of a 12b-1 fee) and/or a hefty “fine” if you sell early. If you are going to buy funds through a broker or advisor, make sure you understand exactly what these classes mean. Don’t fall for the glossy brochure or the sales pitch. You are now smarter than that.

If you have a least a moderate amount to invest, there’s a decent chance that you will qualify for a reduced commission on “A” shares based on something called “break-points”. Each fund company you deal with should have predefined levels of investment at which you qualify for commission reduction. These amounts typically are for your total investment for all funds you buy from the fund company, not just for how much you invest in one fund. Thus, for instance, a regular upfront commission on A shares of a fund may be 5%. But if you invest $25,000 in company funds this commission may drop to 4.5%. There may be further break-points at higher investment levels. It’s a shameful fact that some brokers don’t make individual investors aware of these breakpoints. After all, they take money out of the broker’s pocket. But they ARE REQUIRED to tell you about breakpoints IF YOU ASK. So please do.