Share Class Conversions for Lower Investment Costs

January 22, 2015  | By Kevin Smith

Part of our job as financial advisors is to seek out the best investment service relative to fees for our clients. One of the many benefits of moving your accounts to TD Ameritrade is access to lower cost mutual fund share classes. This is an important element of managing the fees you pay for professional investment management. We will explain what this means and how it works by using an example, although the same principles apply to a variety of the mutual funds you own. We are in the middle of processing these improvements to your accounts, which you will see reflected in the details of your account statements. The following information is fairly technical, but those who have an interest in understanding the true costs of investing need to be familiar with these concepts. Let’s first take a look at what information lies in the name of a mutual fund.

PIMCO Income D – what does this mean?

  • “PIMCO” is the name of the investment company (Pacific Investment Management Company) who places your money in the marketplace according to their decision making process.
  • “Income” is the name of the mutual fund that PIMCO manages. As it sounds, the primary function of this investment is to generate income.
  • “D” is the name of the share class that determines the fees you pay to PIMCO and affiliated brokers in some cases. The names of share classes (ex: A, B, C, D, Adm, Instl) are not exactly consistent across mutual fund companies, which makes understanding the fee structure more complicated.

Here is a quick explanation of share classes using PIMCO Income as the running example. The actual expenses vary by investment company and specific mutual fund.

These share classes are typically offered by brokers who work for a commission.

  • A Shares, 3.75% up front, 0.85% annual – pays an upfront commission of 3.75% to a broker, a 0.25% annual commission to the broker and 0.60% goes to PIMCO.
  • B Shares, N/A – almost obsolete these days and not offered by PIMCO. They usually pay an annual commission of 1% and out-going commissions when you sell as high as 4%. Investment company expenses are often higher with B shares.
  • C Shares, 1.60% – pays an annual 1.00% commission to the broker. The remaining 0.60% goes to PIMCO.

The following share classes vary widely among investment companies. The common theme is none of them pay commissions to brokers. Instead, a fee-based advisor makes arrangements directly with the client.

  • D Shares, 0.77% – pays NO COMMISSIONS, 0.25% pays the custodian for transactions and 0.52% goes to PIMCO.
  • Adm Shares, 0.70% – also pays NO COMMISSIONS, 0.25% pays the custodian for transactions, and 0.45% goes to PIMCO.
  • Institutional Shares, 0.45% – also pays NO COMMISSIONS and the entire 0.45% goes to PIMCO. NOTE: there is typically a fixed dollar transaction fee charged by the custodian (TD Ameritrade charges $25/trade) because none of the fees go to pay the custodian for transactions. This share class tends to make sense if you are buying at least $10,000 and do not expect to make many transactions over the course of a year.

For clients who own less than $10,000 of PIMCO Income D, we will convert to the “Adm” share class (stands for Administrative)

  • Convert from PIMCO Income D  with a 0.77% expense ratio to PIMCO Income Adm with a 0.70% expense ratio. This amounts to $7 of cost savings per year on $10,000 of investments.
  • They are the same investment and we are converting ‘D’ share class funds to ‘Adm’ share class funds without transaction fees.

For clients who own more than $10,000 of PIMCO Income D, we will convert to the “Instl” share class (stands for Institutional)

  • Convert from PIMCO Income D  with a 0.77% expense ratio to PIMCO Income Instl with a 0.45% expense ratio. This amounts to $32 of savings per year on $10,000 of investments.
  • They are the same investment and we are converting ‘D’ share class funds to ‘Instl’ share class funds without transaction fees. Note that any future purchases or sales of this investment will incur a $24 transaction cost.

We hope that this example helps illustrate our approach to managing investment management and transaction costs. Please contact us if you have any questions.

 


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Posted in: Bonds, Investing, Stocks
Kevin X. Smith, CFA
512.467.2003   |  [email protected]

Kevin is responsible for advising clients for whom he is the lead financial advisor. He also manages the operations and development of the firm, and oversees all of the investments of Austin Wealth Management clients. Kevin is on a mission…Read More




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