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Important Things to Know about B Share Mutual Funds

There has been quite a bit of controversy surrounding Class B share mutual funds in the last few years.

The NASD and SEC are taking a very close look at advisors that do a lot of B share business; attempting to determine whether or not the B share investment recommendation(s) are in the best interest of the client or the advisor. The argument against advisors recommending B shares is that often times the financial advisor’s motivation is the commissions generated from such a recommendation.

With that in mind, here are a few things you should know about B share mutual funds to determine whether a purchase of a B share in your account was appropriate for you and/or whether the purchase of the B share amounts to an actionable securities fraud case:
1.  Class B shares do not have a front end sales charge. Unlike A shares, where your starting value is reduced by the front end load, with B shares you start with the full amount you plan to invest. For example, with an A share if you have $25,000 to invest and pay a 5% load, your starting investment is $24,000. With a B share you start with the entire $25,000.

2.  Instead of an upfront sales charge you are faced with a contingent deferred sales charge (or CDSC). This charge is a deferred sales charge which is contingent on you selling out of the fund (usually) in the first 6 years of owning it.

3.  Brokers and advisors that sell B shares are paid a flat commission, usually 4%, regardless of the size of the initial client investment. So it doesn’t matter whether the size of the trade is $10,000 or $700,000, the broker still makes 4%. This is where the conflict of interest between client and advisor usually begins.

4.  Class B shares don’t have breakpoints. Unlike A shares that offer reduced charges at certain breakpoints, B shares do not have breakpoints. As such, the financial advisor’s commission, regardless of the size of the investment, remains 4%. Accordingly, a broker might recommend a B share on a mutual fund purchase, as opposed to an A share, because the commission on the B share is greater than the commission on the A share after accounting for the A shares breakpoint discount.

5.  Be suspicious of an advisor that offers no fund alternatives other than the B share.

6.  Be suspicious of an advisor that tells you there is no charge for buying a B share.

7.  The annual expenses are much higher for a B share, when compared to those of an A share. This is because of distribution fees charged against the assets of the fund. Basically, the fund has to hit you somewhere, and to make up for the 4% commission they paid the broker, as well as, the pass they gave you on not paying an upfront charge, the fund charges higher distribution fees than are typically charged on A shares.

8.  Most Class B shares convert into Class A shares after a certain number of years, usually after a period of 8 years. At that point, your investment takes on all the characteristics of an A share, including reduced annual operating expenses.

If you are concerned about investments you made in B share mutual funds and would like to speak to a securities attorney, please call The White Law Group at 312/238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at www.whitesecuritieslaw.com.

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