Investment Companies - Share Class

Classes of Shares
Most open-end investment companies offer several classes of fund shares. The most common examples are A, B and C shares, although some fund families offer R and F shares for special categories of investment such as college savings plans or employee retirement shares.

Share classes differ primarily in the way in which their sales charges and distribution charges - that is, loads and 12b-1 fees - are assessed. Although the specifics of the different classes sold by each fund family vary widely depending on the fund, most funds offer the share classes listed below.

  • Class A Shares: Class A shares usually have front-end loads. Those investors purchasing larger numbers of shares can usually take advantage of reduced sales charges at defined intervals, known as breakpoints. These shares also have smaller 12b-1 fees.
  • Class B Shares: Class B shares come with back-end loads (CDSCs), so investors do not pay front-end loads. They only pay a sales charge if the shares are redeemed within the CDSC schedule; otherwise, the sales charges are limited to the 12b-1 fees, which are usually higher than those of other share classes. Once the CDSCs are reduced to zero, these funds convert from B shares to A shares.
  • Class C Shares: Class C shares usually charge a level load that is equal to a stated percentage of the fund's assets . This sales charge will be assessed by the fund for either a stated period of time such as 3-5 years or for the entire holding period

The article, The ABCs of Mutual Fund Classes, contains useful information about the pros and cons of each type of mutual fund share.

  • Other Share Classes: For other special types of investors, such as employees of broker-dealers, 529 college savings plan investors, institutional investors or investors with fee-based accounts, mutual fund companies offer a number of different share classes that take into account the initial purchase size and type of investor. As a result, the initial sales charges and 12b-1 fees will differ for each share class.

Deciding What is Best
So, which share class is best for your client? This is one of the most important questions you will have to answer in your career as a Series 6 representative. As a rep, you must find out three things about the client:

  1. How much money does he/she plan to invest over the next 13 months?
  2. How long does the investor plan to own the mutual fund shares?
  3. Does he/she own any other mutual funds?

The importance of these questions will become more apparent as you read through the following sections.

Reduced Sales Charges/Quantity Discounts
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