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12B1 AND ABC

May 13, 2008

Mark on the markets Mark Patterson

12b1 and ABC

Mutual funds come in different flavors and fee structures. Funds sold by brokers will be classified as A, B or C. Funds used in managed accounts or that you might choose yourself would be no loads or advisor class. These no loads have no commission, but must be examined for fees charged by the fund company known as management fees.
12b1 fees are fees that were originally used to promote the fund through advertising, and to defer some other expenses, but now have turned into a ‘trail commission’, in addition to the up front commission to the selling broker.
A shares carry a front end commission or load of about 5%. This goes to the selling broker. Management fees in these A shares which go to the fund company, run abound 80 basis points or 8/10ths of a percent. Around 25 basis points goes to the broker as a trail commission.
B shares have no front end load, but have a back end load if you sell the fund inside a 6 or 7 year timeframe. Management fees average around 1.9% and the broker gets a .75-1.00% trail.
C shares usually carry a high annual fee around 2% of which the broker gets about 1% trail.
No-Loads usually have between a .25-75 basis point management fee and no 12b1.
Many exchange traded funds have .07 to 75 basis point expense and no 12b1.
So let’s compare some real funds against each other for a comparison of commission and expenses. American funds, Growth fund of America A, is one of the largest funds in existence. It has a 5.75% front end load and an annual fee of .62 basis points and 12b1 of .25 basis points. The 3 year performance has averaged 7.53%.
Compare that to I shares ETF, ticker symbol “IWF”, that has similar holdings as American funds Growth A.
IWF has no sales charge, except a commission from your discount broker, say $9.00, and an annual expense of 20 basis points and no 12b1. It has averaged 8.67% over the same 3 year period.
My opinion is that if you must pay a broker for your funds you use A shares, where you pay upfront, with lesser annual expense. The least desirable would be B or C shares that have very high annual expense that never go away.
The ideal method would be to use no-loads or ETF’s and do it yourself or hire an advisor who will manage your portfolio using low cost and low expense funds.
You will find that if you do some research on your own, a whole world of really good mutual and exchange traded funds, that are low cost and great performers, as well as very effective methods of diversifying your portfolio are available

Mark Patterson is a registered investment advisor with MHP Asset Management LLC, and can reached at 447-1978 or Mark@MHP-Asset.com