The financial services landscape is an ever-changing environment. Mutual fund share classes are a case in point. Mutual funds are sold in a variety of share classes, with A-shares, B-shares and C-shares being the primary varieties. Ongoing developments in the industry suggest that B shares and C shares may not be around five years from now. In fact, as exchange-traded funds (ETFs) become more popular with investors, the evolution away from B-shares has been realized. (For an introduction to mutual funds, please read Mutual Funds: What Are They?)

Goodbye to Bs
B-shares were once considered a hot commodity for the financial services industry. Financial advisors liked them because they generally have higher management expense ratios (MER) compared to other funds within the same family, making them more profitable to sell. Investors liked them because, unlike A-shares, they were not subject to an initial front end-load. Fast forward to 2008 and the Financial Industry Regulatory Authority (FINRA) issued an investor alert titled “Class B Mutual Fund Shares: Do They Make the Grade?”

In its own words, FINRA issued the alert “because we are concerned that some investors may purchase Class B mutual fund shares when it would have been more cost effective for those investors to purchase a different class of shares.” The alert was merely another manifestation of the long-running concern about mutual fund pricing practices. Many investors would become enticed with no up-front costs, only to realize excessive charges once they tried to cash out. Furthermore, B shares provide the advantage of using your entire investment to gain market exposure rather than paying towards upfront fees. Nonetheless, the back-end load fees were judged to be excessive, given the advantages.

Watch: Mutual Funds
The phase of B-shares seems to be the next likely development. Sales of B-shares have been in decline and represented just 1% of the industry’s assets at the close of 2009, down from 7% in 2000. Mutual fund firms are getting out of the business, with big names firms including Goldman Sachs, PIMCO, American Century and many other financial institutions dropping B-shares from their product lineups. The fund complexes noted that B-shares are no longer profitable, as the fund companies pay 4% upfront to brokers for selling Bs, and make their cut on the back end by selling asset-backed securities. The collapse of the asset-backed securities market turned B-shares into a significantly less valuable product from a seller’s point of view. Pressure on the fund industry to reduce fees in light of poor performance, competition from low-cost ETFs, and pressure from FINRA add fuel to the fire.

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