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On money

Class B shares face increasing scrutiny

By HELEN HUNTLEY
Published February 6, 2005

Class B shares of mutual funds always have been second-class investments. Now it looks as if they could be on their way out of existence. If you're an investor who bought any, now's a good time to learn how fund classes work - and to think about how to make smart fund choices in the future.

When a mutual fund offers different share classes, the underlying investment is the same, but the fees vary substantially. "A" shares are the old-fashioned model, with an upfront sales charge that varies with the amount invested. "B" shares typically have an annual charge and a redemption fee (also known as a contingent deferred sales charge) that gradually disappears over about six years of ownership. In most cases, B shares eventually convert to A shares.

The problem? Brokers have sold investors B shares even when A shares were the better deal. It became a particular problem with larger purchases eligible for discounted commissions on A shares but not on B shares. When B shares became the most popular class of fund shares sold by brokers, regulators began going after brokers for recommending unsuitable investments.

In one of those cases, the National Association of Securities Dealers recently barred former Clearwater broker Gregory Jurkiewicz from the securities industry for failing to respond to queries about B shares he sold while working for Salomon Smith Barney in Colorado three years ago.

In one instance cited, a client could have bought A shares with a 2.25 percent upfront charge, a 1.29 percent annual charge and no redemption fee. Jurkiewicz sold the person B shares with a 2.04 percent annual charge and a declining redemption fee of up to 5 percent. The A shares were a better deal, but the B shares paid a better commission. Jurkiewicz did not defend himself in the action and could not be reached for comment.

With B shares attracting increased scrutiny, brokers have pared back sales or stopped selling them entirely. The Franklin Templeton fund group says it will stop offering B shares at the end of February and other fund companies are expected to follow suit.

"Sales trends for B shares continue to decline industry-wide, while interest in other share classes has increased, and we expect that to continue moving forward," spokeswoman Stacey Johnston said. "We also believe more simplified pricing alternatives are in everyone's best interest."

One problem is that many B share alternatives are not good deals for investors either. In fact, for long-term investors, they can be worse. For example, Class C shares typically don't have an upfront sales charge or redemption fee, but charge a higher annual fee as long as you own the fund. An extra percentage point may not seem like a big deal, but it can reduce long-term investment returns by thousands of dollars.

Investors should be willing to compensate brokers who provide good advice, but that makes sense only if you understand how much you're paying and can evaluate whether the service you're getting in return is worth the money.

Investors can compare costs of funds and fund classes using an online calculator at the Securities and Exchange Commission Web site (www.sec.gov) Click on "investor information" and "calculators."

My husband and I are both retired in our mid 50s and each have three IRAs. We have not had to pay any federal income tax the past two years. Does it make sense from a tax viewpoint to start early IRA withdrawals? Can we each do this on one IRA only, keeping the withdrawals low enough to not cause us to pay too much income tax now?

You have a good idea that should save on taxes, but it can be complicated to do it correctly. You can calculate your withdrawals based on only one or two of your IRAs if that's what works best for you, but be sure to follow through and take the correct payments. You must take payments for five years or until you are 591/2, whichever is longer. The payments should be based on your life expectancy, but there is more than one way to calculate them. For more information, check out the Web site http://72t.net which deals extensively with IRA withdrawals.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 31, 2005, 11:03:49]