Another area where regulators have mandated
greater transparency is with regard to the various ways that brokers
may be compensated or rewarded for selling mutual funds, and the
potential conflicts of interest that may arise from such compensation
arrangements.
Because fee structures vary widely from one fund to another, brokers
that sell mutual funds may be paid in a variety of ways, including
the following:
Payments from these sources compensate brokers for providing a wide range of
services, including administering shareholder records, processing
transactions, training the registered representatives who sell funds,
and investor education. While brokerage houses contend that these
services provide investors and fund advisers with valuable benefits,
regulators decry the lack of transparency in brokerage firm
compensation, since it is virtually impossible for investors to
know precisely how brokers are paid out of fund assets.
Regulators are looking particularly closely at revenue sharing and shelf
space arrangements because of the financial incentives they may
create for brokers to recommend one fund over another. While brokers
argue that spotlighting a particular fund is no guarantee of sales,
others say that compensating brokers for promoting a fund may
not be in the best interest of the firms' clients. The
SEC
has adopted a new regulation mandating clearer disclosure of fund
distribution costs and potential conflicts of interest, and has proposed
a new rule that would require these disclosures at the point —
or time — of sale.
The ABCs of share classes
Mutual fund share classes indicate how sales charges, or
loads,
are levied. Each class has a different fee structure: For instance, Class A shares have
front-end loads,
Class B shares have
back-end loads,
also called contingent deferred sales charges, and Class C shares have
level loads.
Every class of shares has a different fee structure, and depending on how long
you plan to own the fund, you could end up paying more to own one share class
than another.
If you're buying funds through a
broker
or financial adviser, you'll want to make sure to ask what it will cost to hold
each class of shares over time. You can also find a cost breakdown in the
fund's prospectus.
Payments from these sources compensate brokers for providing a wide range of
services, including administering shareholder records, processing
transactions, training the registered representatives who sell funds,
and investor education. While brokerage houses contend that these
services provide investors and fund advisers with valuable benefits,
regulators decry the lack of transparency in brokerage firm
compensation, since it is virtually impossible for investors to
know precisely how brokers are paid out of fund assets.
