To understand the current situation, you first need to understand how load mutual fund shares are purchased. The first option is called A-shares. I call it the ‘up-front’ option. Most load funds charge a 5 ¾% commission ‘up front’ to get in. This amount is smaller if you or close family members already own shares in the fund family, or if you’re making a large purchase. These reduced commissions are called breakpoints. There are no fees or penalties when you sell A-shares. Buying A-shares is too expensive.

The second option, and the most popular, is called B-shares. I call it the ‘pay-when-you-sell’ option, because you don’t pay a commission when you buy in, but you pay one to get out. This ‘back-end’ load decreases over a full 7-year period to zero. So the longer you own your shares, the less penalty you’ll pay – sort of. B-shares have no breakpoints for reduced commissions. Annual fees are much higher with B-shares, and with the average mutual fund owner holding their shares for only two years, B-shares aren’t a good deal either.

The third and least known option is called C-shares. This ‘pay-as-you-go’ option charges a 1% commission annually for as long as you own the fund. There are no breakpoints or back-end loads. Annual fees are less than B-shares, and slightly more than A-shares.

Federal and state regulators have become upset about the brokerage industry’s abuse of B-shares, the ‘pay-when-you-sell’ option. These shares became extremely popular in the 1990s. In fact, they once made up more than 90% of fund purchases. Commission-based brokers were trying to compete with the popularity of no-load funds. Turns out investors don’t like paying high commissions (what a surprise!) and brokers discovered that selling ‘hidden commission’ funds was much easier.

What investors didn’t realize is that even though they weren’t paying an up-front commission with B-shares, the broker certainly was earning one, usually to the tune of 4%. In order to cover those commissions, funds charged higher annual fees and surrender penalties that ‘locked-in’ a client’s money for the longer term. Once again, the investor got the short end of the stick while the broker took home the bacon!

There has been wide-spread abuse of B-shares, with brokers cheating investors out of lower commissions to which they were entitled. Figuring out which class of shares is best for the client involves work and some brokers probably made mistakes out of ignorance. Others knew good and well what they were doing and used the system to their own benefit.

Bottom line - B-shares were great for the mutual fund companies, but not so great for investors. Many would have paid less commission with A-shares and were blindly being cheated out of thousands of dollars. (If you own both A and B shares in the same fund family, there’s a good chance this happened to you!) Others felt trapped in poorly-performing funds, hesitant to move to funds with better returns because of surrender penalties.

The questionable practices concerning B-shares have come to light, causing sales to drop dramatically and firms paying millions in fines. Because of their declining popularity, Franklin Investment’s Templeton Funds will no longer offer B-shares to their investors. Other smaller firms are doing likewise and the pressure for change will be intensified industry-wide.

My suggestion? Get rid of not only B-shares, but A-shares too! Why pay 5 ¾% to get into a decent fund? It’s unnecessary and creates potential for conflict. There are many no-load funds that rival (or beat) top-ranked load-funds’ performance, without all the commissions and surrender penalties.

If you have to buy a load fund, at least take the C-share option, unless you qualify for big breakpoints. That way your broker will be motivated to keep you happy and you retain the freedom to make changes.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at http://www.guardingyourwealth.com