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Investments - Unsuitable

Mutual Funds: Broker Flunks a Multiple Choice Test

May 21, 2020

by Howard Haykin



A broker recommends that his customers engage in short-term trading of mutual funds. Should they purchase:
  • A-Shares
  • B-Shares
  • C-Shares
  • None of the Above
The correct answer is C-SHARESUnfortunately, the broker in this case recommended A-Shares, which cost his customers $57,820 in upfront sales charges.



WHAT WENT WRONG.    From 2014 to late 2018, the broker who worked PlanMember Securities Corporation recommended and effected 119 unsuitable short-term trades in Class A mutual fund shares in 6 customer accounts. The customers held these Class A shares on average for just 110 days. And on 22 occasions, the customers were instructed to use the sales proceeds from the sold shares to purchase other Class A mutual fund shares – all with a new round of upfront fees.

For the record, PlanMember Securities compensated the 6 customers for their unnecessary costs. The broker contributed financially to that settlement.



THE ABC'S OF MUTUAL FUND SHARES.    While mutual fund companies can have 7 or more classes of shares for a particular fund, there are 3 main classes of mutual funds – A, B, C. Each class has various benefits and drawbacks and, as described below, Class A and Class B shares are geared for long-term investors, while Class C shares are best for short-term investors. Here are some key points:


  • CLASS A shares are better for long-term investors. They charge upfront fees and have lower annual expense ratios. Class A shares are also a better choice for wealthy investors because the upfront fees are reduced for larger investments.
  • CLASS B shares are also better for long-term investors. They charge high exit fees and have higher expense ratios, but they convert to A-shares if held for several years.
  • CLASS C shares are popular with retail investors, and they are best for short-term investors. They have higher expense ratios than A-shares and a small exit fee, which is usually waved after one year.
NOTE: For a further understanding of the features, pros and cons of each share class, click on Investopedia’s The ABCs of Mutual Fund Share Classes.



TAKE-AWAYS FOR RISK-AVERSE RETAIL INVESTORS.    Stick to “buy and hold” strategies, in which you buy stocks, mutual funds or exchange traded funds and hold them for long periods regardless of fluctuations in the market. This means taking the difficult but sensible approach of "Doing nothing" or "sitting on your hands" when financial markets are volatile - and even when markets collapse (as just happened with the COVID-19 Pandemic). LEAVE TRADING TO THE TRADERS.



[For further details, click on … FINRA Case #2018060233501.]