“On the first day of Christmas my broker gave to me, a huge fat commission to pay.”

It’s interesting when people come into my office to talk about their portfolios, one of the many things we talk about are commissions. A commission is compensation that a stock broker receives for selling you a product or stock. This is just one of the many EXPLICIT costs when investing. These commissions have a range from 5% on the front of the sale, called a front-end load, or the commission could come later either out of the fund itself (12b-1 fees) or after you sell (back-end load). Basically, in investing terms, a LOAD is a commission that will be taken out of your investment. Let’s take a look at a few different types of mutual fund shares. This list will not be all inclusive, but will definitely give you a good idea of this subject.

A-Shares are usually a FRONT-END LOAD type of mutual fund. The idea behind this fund is that you pay the commission right when you buy it. What I find interesting is that the Securities and Exchange Commission (SEC), who are basically the watch dogs of the investing world, do not limit the size of the sales load, but the Financial Industry Regulatory Authority (FINRA) whose chief role it is to “protect investors by maintaining the fairness of the US capital markets,” does not permit mutual fund sales load to exceed 8.5%! 8.5%!!! Could you imagine having to pay that kind of sales charge? That would mean that you would have to make 9.3% in order to just break even. But, don’t worry, MOST mutual funds do not charge the maximum charge. If that wasn’t enough, there is also an IMPLICIT fee inside of the mutual fund called a 12b-1 fee.♥♣

“An ANNUAL marketing or distribution fee on a mutual fund. The 12b-1 fee is considered an operational expense and, as such, is included in a fund’s expense ratio. It is generally between 0.25-1% (the maximum allowed) of a fund’s net assets.”♦

B-Shares may or may not have a front-end load, but have a Contingent Deferred Sales Load (CDSL). This is a type of fee that typically decreases the longer you hold onto it, and could even go to zero. You are still paying the 12b-1 fee, but it usually is then converted into a class of shares that has lower 12b-1 fees and no more sales charge once the holding period is satisfied.

Finally there is a C-Share that may have a CDSL and 12b-1 fees, but the CDSL would be lower than Class B- or A-Shares and it would never convert to a different type of fund later on. All of these fees are EXPLICITLY shown in the prospectus that every investor is supposed to read before they purchase these types of investments. The problem is that 99% of people do not, and therefore might be unaware of how these fees affect their lives or their portfolios. There are alternatives to these types of investments, and I would love to discuss them further with you. If you would like, you can leave a comment or question below. You don’t need to know everything about investing; you just need to know a few of the right things.

♣. http://www.sec.gov/answers/mffees.htm
♥. http://www.sec.gov/answers/mfclass.htm
♦. http://www.investopedia.com/terms/1/12B-1fees.asp

Philip A. Guske