If most people can not easily explain how they are getting charged for services, you can almost always bank on a rip-off in your midst. Such is the case with many mutual funds and their "fund classes". Just like when a corporation offers up shenanigans like "super-voting" shares, grab your wallet.

Get this. The same organization with the same portfolio and same manager can have "A" class, "B" class, and "C" class shares. In some extreme cases they can also have "D", "E", "Z", and more, but these are rare and we will not go into them here.

"A" shares generally refer to the shares that have a front end "load" or sales charge. This is normally in the 3-5 percent range. This means that 3-5 percent of your investment comes off the top before it is even invested. Your $100k investment just became $97k with a 3% sales load. This sales charge is often split with the financial adviser, mutual fund supermarket, or other intermediary who placed you in this fund. Oft maligned, load funds are not always the worst possible solution. In many cases, the ongoing management fee that is charged every year is often lower for the "A" shares. If you intend to hold the fund for a long period of time, then this might actually be the cheapest way to go. More on this later.

"B" shares waive the front end load, but instead employ a contingent deferred sales charge (CDSC), or a back end load. In plain English, this means that you are not charged up front, but if you redeem your shares from the fund, you may face a sales charge. The most prevalent CDSC's are those that are reduced or phased-out over time, say seven years. If you hold the fund for seven years or longer in this example, you pay no front end or back end load. Why the complexity? The aforementioned intermediaries are likely to want their vigorish up front, so the fund obliges them, but wants to make sure they will get their money back from you. Placing these onerous restrictions enables the fund to at least cover their out-of-pocket expense for recruiting you. Again, "B" shares can be the cheapest alternative for a specific fund if you have a long-term horizon.

"C" shares have neither a front end nor back end load. However, it is likely that if a fund has this alphabet soup in the first place, the ongoing management fee is going to be higher than the "A" or "B" shares. Therefore, while every penny of your investment is put to work right away, over a long investment horizon, you may be paying more.

Which Class is Right For You?

With very few exceptions and for several reasons, the answer to this question is none of these classes are right for you. In fact, if you are presented with these fund options, you are likely getting hosed by your investment adviser. The reasons these classes exist is so that fund companies and advisers, two fiduciaries who are obligated to have your best interests foremost, can arrange how to split up your money. I am a firm believer that, in that circumstance, your interests will not be put first. By and large, the funds that employ these practices have a higher than average total expense ratio. I will always come back to the principle that the most reliable way of tweaking your mutual fund performance is to pick funds with low expenses and low turnover.

Most of the fund companies employing this method also have in-house advisory or brokerage services. Surprise, surprise. The real reason they love this method is that sales charges lead to immediate money for them. In theory, they are correct is saying that long-term horizons will make the loaded funds cheaper. However, let me be clear on this point, because I came from this culture myself. In a few months, or years, they are going to call you up again to advise you to switch funds, and ding you again. It sickens me. Really.

There Is A Better Way

To me, there are three superior approaches than buying class-laden funds, and only one of them involves a shameless self-promotion. :-) First, there are dozens of well managed, low cost, actively managed funds. Your adviser will not mention these, because he does not get paid for selling them to you. Second, I keep coming back to indexing and index funds. They are mostly low-cost, low turnover, and class-free. The principle mentioned above explains why I prefer this method over the former. Third, folio investing offers the benefit of zero cost, long holding period, tax advantage, and social screening. First Sustainable's program enables investors to, in effect, create their own mutual fund, based on their long term needs and social criteria.