For mutual-fund share classes, the landscape has changed dramatically over the past 10 years.
One of the biggest shifts: More dollars are going into low-cost Class I, or institutional, shares, while the market for B shares, with their "back-end loads," has shrunk to a mere slip of its former self.
The transformation reflects broader shifts in how financial advisers get paid, as financial advisers have moved more toward fee-based compensation and away from selling certain classes of shares depending on what the classes pay in commissions.
Here's the current lowdown on three major classes of fund shares:
Class A shares
Class A shares were once the standard type of share offered to individual fund investors. Back when markets were less volatile than in recent years, investors were less resistant to the kinds of fees and commissions that came with the shares, and still do, including upfront sales charges that often range from 5.5% to 5.75% on a stock fund. (In addition, their operating expenses may include a small continuing payment for sellers.)
Today, with the shift toward fee-based compensation for financial advisers, many still put their clients in Class A shares but waive the upfront load. As a result, A shares remain popular, in part because the required minimum purchase tends to be much smaller than it is for, say, institutional shares.
But even with the upfront load waived, Class A shares are still more expensive than some other classes -- I shares, for example, whose lower fees reflect the fund companies' lower cost of handling larger orders.
"Class A shares are always an available and viable option, but the upfront load detracts from investors' invested capital," says Scott Sipple, head of investment product management and development at Putnam Investments. He says more than half of Putnam's A-share sales are load-waived.
In 2003 net assets in Class A shares totaled about $1.3 trillion, according to Morningstar Inc. MORN +0.89% By 2006 that number rose to $2 trillion. After some market fluctuations, it was back at that level as of the end of April.
The Relative Dinosaur
Class B shares
B shares rose to popularity in the 1990s because they don't charge a front-end sales charge like Class A shares do. But that doesn't mean they aren't pricey. They actually can carry higher costs than A shares.
Typically Class B shares generate money to pay a selling agent in two ways: through higher continuing expenses than on Class A shares, as well as a contingent deferred sales charge, or back-end load, which comes due if the shares are sold within several years of purchase. After several years, they often convert to A shares, with lower expenses.
In recent years, however, as scrutiny over how brokers earned their commissions increased, B shares fell out of favor -- with investors, financial advisers and with fund management companies, many of whom no longer offer them. American Funds and Fidelity Investments, for instance, no longer offer Class B shares for investor purchase.
"There was a lot of bad press about B shares," says Gary Alt, adviser with Monterey Private Wealth Management. One concern was that some investors didn't realize they were paying a load because they weren't seeing the charge upfront. And regulators brought several enforcement actions against firms that improperly sold B shares to investors who made large purchases, which would have entitled them to volume discounts if they had bought A shares. The Financial Industry Regulatory Authority has an "Investor Alert" about Class B shares on its website, finra.org.
In 2003 net assets in Class B shares totaled $353 billion. At the end of April that total was down to $40 billion, according to Morningstar.
The Cool Kid in Class
Class I (institutional) shares
The most widely held share class now is the institutional class. I shares typically have the lowest expenses of all of a fund's share classes, with nothing built in to compensate sales agents. This class may be available only to investors who plunk down $1 million or more. But advisers may qualify to use I shares based on the money they invest across all their clients' accounts.
In 2003, there were roughly $766 billion in net assets in institutional shares, according to Morningstar. By the end of April, that number rose to $3.4 trillion, marking the biggest growth of any type of share class Morningstar tracks.
"What you've seen happen is more and more advisers going the fee-only and fee-based route" and looking for the very cheapest shares, says Mr. Alt.
In 2000, Vanguard Group created the no-load Admiral share class -- a type of institutional share class -- for investors with at least $150,000 in certain Vanguard funds for at least three years. The minimum has since declined to $50,000 for actively managed funds and $10,000 for index funds. Some 75 Vanguard funds offer Admiral shares.
"In the old days, more funds were sold on a load basis. Share classes were about being able to pay a commission," says Paul Heller, head of Vanguard's retail investor group. "Now money is flowing to lower-cost funds."