- "A" class shares typically charge a front-end load....."A" shares may also impose a 12b-1 fee, but it's generally the lowest 12b-1 fee of any share class....."A" shares are also the only ones sold with "breakpoints," which are basically volume discounts.....The first breakpoint for most load funds is $50,000.....If you invest up to $49,999, you pay the highest front-end load (say, 5.75%).....But if you invest even one dollar more, you qualify for a lower load (4.5%) on your entire purchase.....Loads continue to drop at various breakpoints, and loads loads typically disappear entirely at $1,000,000.
- "B" class shares don't charge a front-end load, but they do impose hefty 12b-1 fees.....Class B shares also normally impose a contingent deferred sales charge (CDSC), which investors pay when they sell their shares.....The CDSC normally declines over a number of years, and it's eventually eliminated if the shares are held long enough.....Once the CDSC is eliminated, Class B shares typically convert into Class A shares.....At that point, the 12b-1 fee paid by both classes is identical.
- "C" class shares typically charge the maximum permissible 12b-1 fee (1%). Many also carry a 1% or 2% CDSC that lasts for a year or two.
When a broker sells an "A" class share, the broker gets paid from the front-end load.....When a broker sells a "B" class share, there's no front-end load, so the fund company reaches into its own pocket to pay the broker, and the fund company typically pays a 4.0% commission.....Now, try to put yourself in the shoes of a broker selling load mutual funds.....Let's say your client has $250,000 to invest in XYZ Fund.....At $250,000, your client has already passed several breakpoints, and your client can probably invest in the "A" shares of XYZ Fund for a 2.5% or 3.5% front-end load (these shares also carry a relatively small 12b-1 fee).....On the other hand, if you can sell your client the "B" shares, you'll receive a full 4.0% commission -- and your client will be on the hook for several years of hefty 12b-1 fees, plus a potential CDSC .....That, in a nutshell, is where the abuse comes in.....Brokers continue to push "B" shares on some clients, even when it's not in the client's best interests, because brokers earn more from certain sales of "B" shares.