Learning the A, B, C and Ds of Broker Fees

If you think there are too many numbers for mutual fund investors to keep track of, be aware that the letters aren’t much easier.

These days, you will find that many broker-sold funds use the letters A, B, C or D in their names. Each letter is used to describe the sales charge that applies to that portfolio, but a recent survey indicates that the letters are being used inconsistently throughout the industry. Such variation raises the danger of investor confusion and makes it harder to compare apples to apples.

It could also foreshadow slightly higher costs for investors if regulators ever decide to force certain funds to change their names, prospectuses, marketing literature and shareholder records to conform to standard nomenclature.

It wasn’t always like this. In simpler times, up until the early 1980s, investors either did or didn’t pay a front-end “load” or sales charge when purchasing a mutual fund.

Commission-free or no-load funds are still around, of course, but the load end of the business has become much more complex, as news ways have been devised to make sales charges more palatable to investors.

Today, you will find plenty of front-end load funds, along with these other important categories:

* Portfolios that combine “asset-based sales charges,” also called 12b-1 fees, and a back-end load. The back-end load phases out over three to six years, so investors don’t pay it unless they sell out within that period. The asset-based charges, however, are ongoing expenses of up to 1% a year, though some funds will stop or at least trim them after a certain number of years.

* Portfolios that charge a “level load” of up to 1% a year, for as long as a shareholder stays. This type of arrangement might have a small back-end charge of up to 1%, but only for redemptions within the first year.

Funds that charge front-end loads have come to be known as A shares. Funds with the 12b-1 and back-end load combination usually have been designated the B shares. Those of the level-load variety are commonly known as C or D shares.

But a survey of more than 1,600 multi-class portfolios offered by 54 fund families, conducted by Dalbar Publishing of Boston, showed that not all load groups adhere to this nomenclature.

For example, only 48% of the funds with C shares charged a level load. Another 22% were no-loads designed for large institutional investors, 16% had 12b-1 and back-end loads, and the remainder had other pricing options.

Of the D-share funds Dalbar examined, 46% had level loads and 36% had the 12b-1 and back-end combination. Institutional no-loads accounted for the remainder of this group.

Class A shares are mostly used to designate funds with front-end sales charges, but some firms also apply the label for no-loads, Dalbar found.

And while the B shares are used mostly for the 12b-1 and back-end combination, they’re also being applied to all of the other pricing options.

“We knew that there was confusion about level loads being used with both C and D shares, but we discovered there are many more twists and turns,” says Louis S. Harvey, president of Dalbar Publishing. “The worst sin is when the A shares have different meanings within the same fund family.”

If you’re perplexed by these different share labels, you’re not alone. “There’s massive confusion among the public, the media and the industry itself,” says Peter F. Muratore, president of the New York-based Quest for Value fund family.

Quest for Value was one of eight fund groups cited by Dalbar for straying from the common nomenclature, although Muratore denies it. The others were Nicholas-Applegate, PaineWebber, SEI Financial, Seligman, Van Kampen Merritt, Wells Fargo and Zweig.

Brokers themselves are sometimes confused by the various pricing strategies, and for this reason they may be reluctant to deal with more than a few fund families, says Greg Ellston, manager of the mutual fund department at brokerage Rauscher Pierce Refsnes in Dallas.

The Securities and Exchange Commission has expressed fears in recent months that a good many investors don’t realize that mutual funds are not federally insured against loss. That’s an important subject, but it’s also a simple topic compared to the much more complex issue of how load funds are priced.

Harvey holds the SEC partly to blame for allowing the confusing nomenclature to spread. One of the agency’s duties, he notes, is to prevent fund companies from adopting misleading names.

Some measure of help might be on the way if a proposal being considered by the Washington-based Investment Company Institute is adopted.

While details still have to be worked out, the plan would allow some standardization of A, B, C and D shares, while creating a class of no-load X shares for institutional investors and no-load Z shares for employees of fund companies.

However, that plan would still allow flexibility on how fund groups can designate their pricing structures. At any rate, it’s expected to be a voluntary measure.

In short, it might be a while before the various share classifications are clearly linked to specific sales charges. Until then, investors will have to carefully read the prospectus sections on expenses and how to buy shares--or hope their brokers have.

Fund Charges, From A to Z

Many broker-sold mutual funds include an A, B, C or D in their names. These letters are intended to indicate what type of sales charge applies to the fund, but the letters aren’t being used in a uniform manner throughout the industry--creating the potential for investor confusion. A proposal being considered by the Investment Company Institute, the Washington-based trade organization for the fund business, would create the following standards. Even if approved, however, they would probably be voluntary.

* A shares:

Front-end load--Yes

Back-end load--No

Asset-based sales charge--Optional

* B shares:

Front-end load--No

Back-end load--Yes

Asset-based sales charge--Yes

* C shares:

Front-end load--No

Back-end load--Optional

Asset-based sales charge--Yes

* Vanguard D shares:

Front-end load--Yes

Back-end load--Optional

Asset-based sales charge--Yes

* Y shares (institutions):

Front-end load--No

Back-end load--Optional

Asset-based sales charge--Optional

* Z shares (fund employees):

Front-end load--No

Back-end load--No

Asset-based sales charge--No