B Is Not for BadB Is Not for Bad

Stan Luxenberg

Class B mutual fund shares are under assault. Dreyfus became the second fund company to stop offering B shares in March; Franklin-Templeton was the first in 2005. And many brokerage firms have put strict limits on sales. Assets in B-class shares were already declining — but that decline has accelerated (see table below). Regulators spurred the steps, fining some advisors for recommending B shares when A shares, which offer so-called breakpoint discounts, would have been cheaper for clients.

But B shares do have their place. And a new study by Morningstar bears this out. To quantify the advantages of different share classes, Morningstar looked at 803 funds. For each fund, the researchers considered hypothetical clients who invested different amounts and for varying time periods. For example, an investor who put $10,000 into Van Kampen Growth & Income and held the fund for four years would do best with C shares. Someone who put in $50,000 and held the fund for six years should pick B or C. Investors who put in $250,000 and held for four years or longer did best with A shares.

Because A-share breakpoints are usually available to clients with more than $50,000 to invest, many firms have imposed rules requiring that advisors sell B shares only to clients with less than that. The rule has helped to eliminate abuses, but it has also probably cost some smaller investors money, Morningstar says.

“There are some instances when B shares make the best choice,” says John Rekenthaler, Morningstar's vice president for research. So firms should allow advisors more flexibility, he says. “The guidelines should be guidelines, not rules set in concrete.”