August 15, 2010
I believe that the proposal to change the C share class structure of mutual funds in well intended but misguided in its effort to serve the public interest. The C class share allows for a long term relationship between the advisor and client. Front end loaded sales charges reduce the need for service from the advisor as once the advisor is paid, there is no financial incentive to service the client or provide other tax or estate planning advice that is offered to my clients at no additional charge. The C share class also allows for early liquidity of investor funds. After one year, the clients funds are fully surrender charge free and available for emergency use or an alternative investment option that may better serve the client and his or her changing needs.
My fear is if you change the C share to A shares after a few years, you will see unnecessary fund exchanges just to maintain cash flow for advisors. This will result in damage to consumers and not the intended benefit of the proposal. A mutual fund purchase should not be considered a long term decision where the funds will remain for many years without change which is the only situation where the A share holds an advantage. Unfortunately, I see many cases where an advisor sold someone A share mutual funds years ago and they are still holding now poor performing funds or a fund that no longer matches their financial or risk objectives. They feel like they should hold these old funds rather than pay another upfront sales charge to move to a better performing investment.
Money should be continually monitored and managed and the best way for compensation in this case is a level fee option that provides a long term compensation for the advisor and long term service to the client and liquidity of client funds.