I inherited money that was invested for me in one mutual fund. Ticker = SBUPX. My search says that the B share carries a much higher expense ratio than the A share for the same fund. Can I / Should I switch? I was also instructed by a friend to look into ETFs since my biggest concern is really cost.
SBUPX is a B share. Being a B share, it will levy a surrender penalty that gets phased out over time. You need to clarify how many years the surrender penalty runs until it reaches 0%. A shares can have as higher (or a higher) one-time front-end charge. I believe most of my fellow advisors would recommend you consider no-load mutual funds or ETFs to avoid incurring future front/rear or recurring (C shares) charges. Be aware brokers utilize A, B and C loads to earn a living. Most clients I meet with A, B or C mutual funds aren't clear about how these charges are levied. I believe there is a wide universe of no-load mutual funds and ETFs that offer inexpensive and excellent investment opportunities.
Keep in mind since SBUPX is a B share fund that you may be subject to a back end load (contigent deferred sales charge CDSC) that typically lasts about 5 years from the date of purchase on a typcial B share fund. The custodian would know if there is a charge. Most B share will automatically convert to A shares after this period is up. The reason the expenses are higher in a B share than an A share is that you are paying and extra 1% 12b-1 fee to cover the commission fronted the broker. Once it's an A share, that will go away. Even this fund's A share counterpart has very high expenses at 1.29%. I do like ETFs, but you need to undertand the consequences of switching first.
You own the Principal SAM Flexible Income fund. It is a fund of funds and as you noted has a high expense ratio. The Principal Prospectus has the following quote: “Class B shares have higher annual expenses than Class A shares because they are subject to distribution fees for the first eight years. After the eighth year, Class B shares convert automatically to Class A shares of the same Fund, typically without income tax impact.” Also in the prospectus is the following statement. “You may speak with a Client Relations Specialist by calling 1-800-222-5852, between 7:00 a.m. and 7:00 p.m. Central Time on any day that the NYSE is open.” So you can call with your account number and find out how long the fund has been owned. If it has more than 8 years the fund should have already converted to an A share. If it has been less than eight years you will pay an extra fee to get out of the fund. Even the A share the fund carries a .25% 12b-1 or distribution fee included in the 1.29% total expense ratio. If your real concern is cost stick with no load index mutual funds. ETF’s may be slightly less expensive but you will be subject to the bid ask spread when you buy and sell and may also have to pay a transaction fee.
B share has a contingent deferred sales charge, along with a 12(b)1 fee, usually no upfront sales charge, and after a stated period of time the deferred sales charge expires, and the 12(b)1 fee reduces to a lower level. An A share charges an upfront sales charge, and other fees including a 12(b)1 fee but the A share 12(b)1 is usually less than the B share 12(b)1 fee. Some mutual fund companies are phasing out B shares.
Robert Harper's answer is terrific, and explains the B-Share issue well. There is a lot of information that we don't have which an advisor would need to help guide you. Some important factors on deciding where to invest these funds, once you get past the 8 year issue, are:
-Your age and cash flow needs. If you are young and don't intend to touch this money for 7-10 years, you may want to be more aggressive building a portfolio of index ETF's and/or actively manged mutual funds. If you are going to be relying on this portfolio for income you may want to build an income generating portfolio.
-Your tax situation. Will this investment be subject to long-term capital gains, was it a pass through, or was the cost basis established (stepped-up) at the date of death. As Mr. Harper pointed out, after 8 years this may be convertible to an A-Share with no tax consequences, so this has to factored into the analysis.
After you consider these issues, It may be useful for you to look at Morningstar's analysis of the fund. You may find you can find a less expensive alternative asset allocation mutual fund that has had as good or a better track record. Vanguard may be a good place to look. Or if there are enough assets you my be able to build your own diversified portfolio using ETF's and/or mutual funds.
Hi Elliot, you asked about the difference between A and B shares.
An easy way to understand the difference between A and B shares in funds is simply that both will charge a commission to compensate the broker. A shares charge it in front and pay the broker. B shares won't charge you the entire commission in front. Instead, they will amortize that commission over four or five years, so you might pay, for example, 1% more per year for five years instead of 5% in front. Since the fund company is paying the broker in advance, the surrender charge is the unpaid commission which declines each year by around 1% until the entire commission has been covered. If the investor leaves early, the remaining commission is collected as a 'surrender charge'; and, as Alan stated, the B shares then convert to A shares to reflect the fact they are no longer collecting the commissions from the investor since all have been collected and paid.
If you're working with a broker, A or B shares provide compensation. If you are investing on your own, your friend is right that you probably shouldn't be paying for help you're not receiving.
I do agree with the comments made by Eve and Alan above. I'd be looking at the no-loads and ETFs but switching may have consequences worth evaluating.
I would recommend you contact someone at Principal or where ever your Mutual Fund is currently held. I would also recommend you doing some homework on the complete cost of getting out of SBUPX. If you are looking for more risk or less risk you could possibly avoid the "back end" sales charge by swapping into another B Share fund managed by Principal. This should not extend the length of time you need to be invested before your CDSC expires (make sure to ask Principal first though). I would recommend weighing your options before making any decisions and talking with someone whom you trust in regards to what to do with your inherited B share. Here is some information from investopedia about CDSC http://www.investopedia.com/terms/c/cdsc.asp#axzz1wYTEpYjn
Also be careful about asking to switch to an A share as in the case of the current fund you own the B to A transition, will happen on its own. But if you ask for it prematurely you may be charged an upfront commission for the A share.
Check out http://www.principalfunds.com/investor/performance/shareclasses.htm for information on charges on Principal Funds.