Broker Village - Share Class Auditing

Share class suitability is a sensitive issue. In the past, investors often bought the wrong share. They incurred extra fees, which slowed account growth. When the regulators stepped in, the problem was fixed, so everyone thought.

Unfortunately, buying the wrong share class still is a common problem. Some of the causes are rooted deep in the math. They are not easy to see, nor intuitive. Hence, senior executives may be unaware of them.

The problem is acute for investors who pay a load and have under $50,000 at one fund firm. They buy A-shares when B's or C's are best for any horizon or return. One cause is the strong pull of conventional wisdom, which is often wrong: “Buy A-shares for the long-term as low annual fees will offset a load.” The corollary also is suspect: "Lowest cost equals highest account value." The interplay of many factors makes it unwise to apply this wisdom blindly. Odd as it seems, high cost shares can out-perform low cost shares.

This "wisdom" is perpetuated unwittingly in brochures, prospectuses, and via sales limits. Consider these real-life examples. We found the problems and fixed them.

· Brochure: "In the long-term A-shares almost always outperform." So proclaimed one brochure. This was true for the firm's stock funds, but not for its bond funds.

· Prospectus: In the fee example, the B/A "flip" was forgotten. B-share costs were far too high. The share looked uncompetitive when, in reality, it was often best. This is one of several ways to get these costs wrong.

· Online Calculator: The A-share load was forgotten and returns were improperly calculated. A-shares were presented as the best share class by a wide margin. The actual margin was tighter or zero.

· B-Share Sales Limit: A fund firm set a limit of $49,999 on all B-shares. A partner B/D was more restrictive, setting it at $24,999. In fact, for several funds, the limit should have been $249,999, so said the math.

This is where Broker Village can help. If you discuss share classes in a brochure or on the web, we should check the text. "Facts" differ for stock and bond funds. If the results of your online calculator don't match those of the regulators or Morningstar, we should fix it. Otherwise, it may recommend the wrong share class. If you set every fund's B-share sales limit to $49,999 or $99,999, that's far too restrictive. Limits must be set on a fund-by-fund basis.

With our Share Class Analyzer and auditing services, firms can eliminate these problems. The tool calculates account values, fees, advisor pay, and firm revenue for any class of any fund. It is extremely accurate and was audited several times by independent CPAs and a securities lawyer. As a result, executives can better align pricing and sales decisions with client interests. This helps limit liability, protecting a firm's profits and brand.

· Investors can evaluate share classes more objectively and avoid paying undue fees

· Compliance officers can ensure the accuracy of prospectus figures and related suitability text

· Product development can model how portfolio attributes affect a fund’s competitive profile

· CFOs can evaluate the financial impact to the firm of launching, closing, or re-pricing a fund

· Sales executives can ensure that advisor pay is competitive yet free of conflicts of interest

· Accounting staff can more quickly and accurately create prospectus expense tables

· Marketing can more quickly and accurately create sales material

· Board of Directors can ensure consistency of prospectus mandates and B/D sales limits

· I.T. can create calculators where the results precisely match those of the regulatory sites