So you finally find yourself in a position to invest some money, but you’re confused about the options. You are a perfectly intelligent person. You are successful and comfortable in your chosen occupation. It’s just that investing seems to be conducted in a foreign language. You hear radio and television advertisements for brokers, advisors, online services, and e-trading accounts. What should you do?
You end up sitting down with a local broker. The broker starts talking about the benefits of investing in a mutual fund. As you listen, it becomes clear that you don’t have the time or desire to research individual companies and select specific stocks. The benefits of a mutual fund make sense: Pool your money with other investors who have similar goals, hire a team of trained professionals to select the right companies, and hold more companies than you could afford to as an individual.
But then your broker starts talking about share classes. Evidently there are A shares, B shares, C shares, and institutional shares, but they’re all in the same mutual fund. You’re talking about the same mutual-fund company, same underlying holdings, same management team…so what’s the difference?
Actually, the difference is simple. It has to do with fees and performance. The accompanying chart illustrates a series of mutual fund share classes.
The “internal expense ratio” is the fee paid to the fund company it charges by share class. The 12b-1 fee is an amount given to the seller (in this case, your broker) as a “marketing fee.” This is part of the seller’s compensation. The “load” is what is paid to the seller either at the front end or the back end (“deferred load”), based on the holding period. Share classes with loads are commonly referred to as “retail shares.” Trust Point does not participate in any form of revenue sharing. We believe that it would be an inherent conflict of interest for Trust Point to select an Investment option for you and then get paid by that investment option.
Almost all funds include institutional shares. However, the minimum investment amount in many cases is $1 million or more, which prevents many individual investors from qualifying for institutional shares. While you may not be able to afford the minimums of an institutional-share-class mutual fund on your own, you can find companies like Trust Point that work on an Omnibus platform. This means they take advantage of all their clients’ assets to get each client into the least expensive share class.
As you can see, from the chart, the internal expense ratio and load can have a very significant effect on the overall performance of the fund. While no one can predict the future performance of a specific mutual fund, what can be quantified and known for sure is the amount of money you are paying to invest in the mutual fund. All of Trust Point’s clients utilizing mutual funds can rest assured that they are in no load institutional share class options.
Do your research, and make sure you understand all the expense ratios, revenue sharing, and loads associated with the funds being recommended to you. Trust Point has a team of professionals that can meet with you and review your current investments. As part of this analysis they can share with you the other opportunities available and there potential benefit. Contact us today.
