Learn how Class B shares work, what makes them different from Class A and Class C shares, and whether they’re right for your portfolio.
Definition and Examples of Mutual Fund Class B Shares
Many mutual funds offer various classes of shares for purchase. They’re typically categorized as Class A, Class B, and Class C shares. Each class of shares follows the same investment strategy and holds the same portfolio of securities. Each share class requires management and operating fees, and many share classes also include a 12b-1 fee. The differences among share classes are in the mutual fund fees and expenses. Because the different classes have different fees, the class shares will have different performance results. For example, the AIG Multi-Asset Allocation Fund offers Class A, Class B, and Class C shares for investors.
How Mutual Fund Class B Shares Work
Mutual fund B shares do not require front-end sales charges, but carry a contingent deferred sales charge (CDSC) and have a higher 12b-1 fee (12b-1 fees are capped at 1%) than other mutual fund share classes. 12b-1 fees are paid by mutual funds to brokers to compensate them for marketing and selling their fund shares. CDSCs are imposed on shareholders who sell their shares in the fund during the surrender period. CDSCs are not paid to advisors, but to the fund company to cover various costs, including the upfront commissions the fund pays to advisors. They’re typically, 4% to 5%, but the Financial Industry Regulatory Authority (FINRA) caps front-end and back-end sales loads at 8.5%. Investors do not see these upfront commissions charged by funds that are paid to the advisors who offer the fund shares for purchase. Specific CDSCs are outlined in the mutual fund’s prospectus and the cost depends on how long the investor holds their shares. Many mutual fund Class B shares have a CDSC that is eliminated, typically, within seven years but the duration could vary. Also, mutual fund Class B shares often convert to Class A shares (which carry no surrender charges and have lower 12b-1 fees) within that time frame.
Class A vs. Class B vs. Class C Shares
If you compare various mutual fund share classes, you might be given a set of scenarios whereby mutual fund Class B shares look more attractive than other share classes of the same fund. As with any investment, the devil can often be found in the details—as well as unforeseen circumstances. It’s wise to remain cautious when using hypothetical scenarios to determine the best investment for your portfolio. FINRA’s Fund Analyzer and similar tools may be accurate when simply comparing the fee structures of Class A, Class B, and Class C shares, but they may fail to take other factors into consideration. For example, what happens if changes to fund management or investment strategy leave you wanting to sell your shares after only a short period of time? If you need to sell a particular mutual fund’s B shares sooner than you expected to, you might be able to switch from one fund to the B class of another fund within the same fund family without incurring surrender penalties (but, you still may incur capital gains and an exchange fee). The question then becomes whether the fund family in which you purchased the original mutual fund B shares has another adequate mutual fund. Will you be forced to settle with a mediocre fund in order to avoid surrender charges? This chart provides a breakdown of the key elements of each class of mutual fund shares. Class B shares do not offer discounts for larger investments, and they typically have higher expense ratios than Class A shares. Unfortunately, the way B shares are explained and the way they are sold is a major problem facing investors today. Millions of dollars in restitution have been paid to investors for suitability issues over the years due to actions of the SEC, while FINRA has also fined and censured numerous brokerage firms after recommending this particular class of mutual fund shares to investors for whom they are not suitable. Along this line, mutual fund Class B shares are often mischaracterized as no-load funds, a particular class of mutual funds that do not charge sales loads but can incur other fees. Be wary of working with an advisor who mischaracterizes mutual fund Class B shares.
What Mutual Fund Class B Shares Mean for Individual Investors
Despite their potential for profitability to advisors, some mutual funds have actually eliminated Class B shares from fund company offerings over the years. This may be due to better-informed mutual fund investors or more scrupulous brokerage firm compliance departments. Whatever the case, you may find that mutual fund Class B shares are no longer offered by a fund. If you do have the opportunity to invest in Class B shares, tread carefully and make sure you do your research before purchasing. It may also be smart to plan your exit strategy, just in case you ever need to sell. If and when you do need to sell, you may owe a sales charge (unless you’ve held the fund for several years). Also, the 12b-1 fees attached during the years you held the fund often increase the cost of B shares, making them more expensive than no-load funds.
