February 27, 2015

There are few activities more routine or common for the modern American consumer than “buying.” You work and save so that you can spend and buy. Rare is the day you’re not purchasing something from someone somewhere. Try imagining the last 24-hour period you didn’t write a check, swipe a debit or charge card, or spend a single penny. Tough, right?

You’d think with all this daily repetition we’d get pretty good at understanding pricing. If practice makes perfect, we should all be masters. And in most cases, we are pretty adept. We know some prices are fixed, others are negotiable. Some charges are good value, others are relatively expensive so we’ll either justify, or wait.

But sellers are also pretty good at massaging the numbers to motivate a sale. A classic example is when a car salesperson asks how much you can afford to spend per month on a car payment. This number obviously has nothing to do with the intrinsic value of the car being negotiated, but it sure does end in a lot of sales.

Another example of creative price dynamics can be found with mutual funds. This doesn’t necessarily apply to “no-load” funds, which have no sales charge (but do still have internal fees). It’s the “load” funds that offer such a broad array of options to confuse even the sharpest of investors.

To begin with, “load” mutual funds generally offer three different pricing options they call “share classes.” It’s hard imagining any other consumer good that needs three separate pricing options, but “load” mutual funds have for some reason deemed it necessary. Here’s the breakdown:

A-share: The first share class is called an A-share, which utilizes probably the most familiar pricing strategy. Like a loaf of bread or pair of shoes, there is a mark-up or sales charge. Unlike those items, an A-share mutual fund actually shows you what the mark-up is, and how it decreases the more you buy. Yes, the buyer actually gets a discount for bulk purchases and that’s a good thing. Not giving this discount has been an area of consumer abuse and forced major disclosure improvements.

B-share: The second share class is called a B-share and this is probably the most abused pricing structure. Unlike the A-share, there’s no up-front charge. Instead, the sales charge is an on-going asset-based charge that is periodically and systematically withdrawn from your invested amount. The problem with this kind of pricing is that investors are often unaware of the fee. There is also usually a contingent deferred sales charge (“CDSC”) should you sell the mutual funds within a certain amount of time, typically six years.

C-share: The third share class is the C-share, which is generally suggested for those thinking they may not be a long-term investor in the fund. There is no up-front charge and a smaller charge if you sell within one year. Like the B-Share, there’s a higher asset-based charge, which, over the long-term, may make the C-share less attractive than the A-share.

The Simply Money Point

While we prefer exchange-traded funds (ETFs) because of their lower costs and greater transparency, mutual funds have been a wonderful investing innovation that many investors have embraced over the years. At their best, they provide low-cost diversification and access to a wide array of asset classes. The downside is the pricing for “load” funds. Even with the general population’s broad experience in buying goods, the pricing dynamic for mutual funds is unnecessarily complicated and rife for abuse. Educate yourself and – if buying “load” funds – make sure you know how you’re compensating the salesperson.

Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email simplymoney@simplymoney.net