10 things you need to know about Class C share mutual funds

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If you read the last post, C shares and how they fit into my business, then some of the bullet points on this list will look awfully familiar to you. If you’ve read 10 things about A shares or 10 things about B shares, then again, some of the points will look eerily similar.

In case you missed it, about 5% of my client investment allocations are made up of Class C share mutual funds. So when it comes to mutual funds, its obvious that C shares are my favorite. That’s C as in Ciaran.

10 things you need to know about Class C share mutual funds:

1. Class C shares do not have a front end sales charge. Unlike A shares, where your starting value is reduced by the load, with C shares you start with the full amount you plan to invest. For example, with a C share if you have $25,000 to invest, you’ll start with the entire $25,000.
2. Instead of an upfront sales charge you are faced with a CDSC (contingent deferred sales charge). Which is exactly what it sounds like, a deferred sales charge, contingent on you selling out of the fund. The CDSC for a C share is lower than that of a B share. There is no sales charge if you hold the shares beyond the CDSC period, which is generally 12 months.
   • Here in lies the flexibility that makes this share class an attractive option. For more on this check out the debate rages on from my previous post.
3. Brokers and advisors that sell C shares are typically paid a 1% commission upfront, and a 1% trail starting in the 13th month, regardless of the size of the initial client investment. The general thinking here is, financial advisors are paid the ongoing 1% trail in exchange for continued investment and financial planning advice.
4. Class C shares don’t have breakpoints. The upfront commission of 1% is low, so there really are none of the upfront commission issues that plague Class A and B shares (like in this fictional example I created).
   • Financial advisors that are willing to take a pass on the immediate gratification of a higher upfront commission are generally looked upon as having their interests more in line with the client.
   • It’s viewed as a commitment to the future and to the longevity of the relationship, since the advisor won’t recoup the equivalent of an A share commission, for many years into the future.
5. Be suspicious of an advisor that tells you there is no deferred charge for selling a C share. There is a 1% charge if you sell in the first 12 months; because the CDSC holding period is short, some advisors don’t even bother to let clients know.
6. Unlike B shares, Class C shares don’t convert into Class A shares. (Wow my heads spinning after writing that last sentence, try and say that one 5 times in a row, lol) This is probably the biggest criticism when it comes to C shares.
   • Because C shares don’t convert to A shares, the internal fees will remain high for as long as you own it. If you hold it for an extensive period of time (i.e. 8 years +), the high internal expenses would make it the least cost efficient of all three share classes.
   • Now, you might be saying to yourself, wait a minute, why then do you think it’s the best mutual fund class? Well, please read C shares and how they fit into my business to see why there’s more to it than meets the eye.
   • After reading that post I hope you see why I think C shares are the way to go. If you’re still somewhat confused, let me put it to you this way. In my opinion, (see next 2 bullet points below)
   • Having a motivated financial planning based advisor (which translates to: you own C shares) managing your investments, as opposed to having no advisor (which translates to: you own A or B shares) is far more valuable, to the average investor, than any fee savings that may occur between share classes.
   • And one could argue, the question of fees is only debatable under the most ideal of circumstances (where an investor holds an A or B share for 8 years+)
7. The annual expenses are much higher for a C share, when compared to those of an A share. This is because of distribution fees (12b-1 fees) charged against the assets of the fund. Basically, the fund has to make up for the 1% ongoing trail they pay the advisor, as well as, the pass they gave you on not paying an upfront charge.
   • Take a look at this sample table (below) I came across. I’ve marked it up pretty good, including commentary that breaks down and compares the different fees and charges associated with each share class. Click image to enlarge.



8. Since C shares have no breakpoints there are no rights of accumulation or LOI’s (letters of intent) here.
9. A financial advisor that offers C shares is aligning his interests with those of the client’s; C shares are the only one of the 3 share classes where this occurs. Because he (or she) is paid 1% of the invested amount, in essence, he will receive a pay raise if the amount increases and a pay cut if the starting amount decreases.
   • This arrangement has many of the characteristics of a profit sharing agreement, which generally keeps the advisor highly motivated. But it can also lead to problems as well. That’s why it’s important to pick an advisor with a solid track record and a clean business history.
   • With this kind of arrangement, the wrong advisor may try and grow the account too aggressively, in the hopes of sharing in a larger asset base. By trying to achieve outsized gains he may position you too aggressively, exposing you to more downside risk than you need.
   • This type of reckless behavior is rare when it comes to C shares. There’s a higher likelihood of something like this happening if you hold individual stocks, especially concentrated positions.
10. It’s time for this one last time. Here’s an excellent mutual fund expense analyzer that’s easy to use and serves up relevant information about the expenses associated with any mutual fund or ETF of your choosing.
    • Although, it’s chock full of useful information, the only slight drawback is it looks at everything in a vacuum. With that said, it’s an excellent way to compare the different fund classes (A, B, C) of the same mutual fund. I’ll have more on how to use this calculator in an upcoming post.

There you have it, most everything you ever wanted to know about C shares…

Tags: Class C Share Mutual Fund, Mutual Fund expense analyzer