Understanding the World of Share Classes
Part One in a Four-Part Series on Share Classes
The differences in share classes really boil down to one thing: fees and expenses that provide compensation for those involved in sponsoring and selling investment products.
Despite a nearly universal desire among investors to minimize fees and avoid costs as much as possible, it’s entirely reasonable for those involved in selling investments to make money. It’s a business, after all, and even regulators understand the need for advisors to be compensated for what they do.
The suitable share class choice for an investor will depend upon his or her time horizon, the amount of the investment, and possibly whether the investor needs investment advice or not. For example, a “do-it-yourself” type of investor may not wish to pay fees intended to cover advisor guidance.
The following is an overview of many of the share class types found in the marketplace.
A front-end load (sales charge) is taken upfront, and it reduces the initial amount invested in a fund. However, over the long-term, A shares are generally regarded as most cost-effective. This share class offers the opportunity for discounts at breakpoints, and 12b-1 fees are lower.
A back-end load (sales charge) is applied when shares are sold. Even though the investor doesn’t pay sales charges upfront, he or she may be subject to higher expense ratios each year.
Also known as a “level” load class of shares, there’s no front-end sales charge; however, penalties may apply if shares are sold before holding them for one year, and yearly expense ratios may be significantly higher – a feature that’s unattractive to long-term investors because of the higher potential expenses over time.
These are no-load shares often sold through large mutual fund houses that sell directly to the public. While these shares may feature no loads and lower expenses, transaction charges may apply.
F shares are sold exclusively through financial professionals. Fees are asset-based, and some carry no 12b-1 fees.
I shares are low-cost institutional shares available to investors who can invest higher upfront capital. They’re typically sold through fee-only advisors.
M shares are similar to C shares.
R shares are created exclusively for retirement plans offered through employers and 401(k)s. Costs vary, but there’s typically no load, and some carry 12b-1 fees.
S shares are no-load share classes, but there may be higher ongoing distribution fees. They may be converted to A shares after a certain holding period.
T shares are offered as an opportunity for investors to take advantage of a lower share price upfront due to lower upfront fees and expenses; however, their distributions going forward will be lower than A class shares due to higher ongoing distribution fees.
Y shares are institutional shares sold directly from a sponsor to an institution.
Z shares are similar to S shares in that they are no-load; however, these are typically older shares that are closed to new investors.
As you can see, the world of investments is growing more complex as fund sponsors create offerings that respond to investor and regulator needs and expectations. Check back soon for a closer look at some of the more specialized share classes available through alternative investments.
Sources and further reading:
Christine Benz, “Making Sense of Share-Class Alphabet Soup,” Morningstar.
Jack Hough, “Beware Fund Share-Class Fees,” The Wall Street Journal.
“Introduction and Overview of 40 Act Liquid Alternative Funds,” Citi Prime Finance.
 12b-1 fees are charged to cover a fund’s marketing and distribution expenses.
The Blue Vault Summit could not have been more perfectly timed. This gathering of the Broker Dealer and Sponsor communities provided insightful and open discussion from several vantage points. These conversations are paramount, especially in a time of significant regulatory change.