Long Resistant, American Funds Says Maybe to Multiple-Level Pricing

It took a while, but the American Funds family looks like it’s ready to yield to the competition.

For years, the Los Angeles mutual fund company--No. 3 in the business at $300 billion in assets and manager of half a dozen of the largest mutual funds in the world--has remained resolute against multiple pricing schemes.

As rivals introduced B shares, C shares and other options--all designed to camouflage the commissions that investors face-- American Funds stood firm.

This is a company that has been comfortable calling a spade a spade by not trying to disguise its sales charges. It did so out of a conviction that loads are justified because investors who seek the guidance of a broker, and pay for the advice, will fare better in the end.

But that stance appears ready to change. American Funds is asking investors for permission to issue new classes of shares on its seven oldest mutual funds, which include some of the most revered portfolios in the business, including the Investment Company of America and New Perspectives funds. Shareholders in those seven funds are being sent proxy statements seeking an affirmative vote.

The company’s 22 newer funds were incorporated with multiple-share options already in place, which means they don’t require a vote by shareholders. So far, the company has not implemented B or C shares on any of its newer funds, and there’s no assurance it will do so on its older portfolios, either.

“The filing of proxies shouldn’t be taken as a decision,” said Chuck Freadhoff, a spokesman for American Funds and its advisory firm, Capital Research & Management. “We will have that ability, but no decision has been made.”

Yet, financial advisors who have discussed the matter privately with American Funds officials say the company is concerned about the ability of newer brokers to sell its wares. Apparently, these less-seasoned middlemen are having trouble overcoming investors’ reluctance to pay a front-end charge.

Indeed, the advice and brokerage business is shifting from a focus on sales “loads” or commissions to fee-based advice. At the same time, more investors want to manage their own investments.

“Clients today want more pricing choices, and they want their advisors to have the ability to move across a menu of funds” without facing a front-end charge, said Don Wilkinson of United Planners Financial Services in Newport Beach. He has been shifting client assets out of the American Funds and into other groups for precisely that reason.

(Pure no-load funds offered by Vanguard, Fidelity, T. Rowe Price, Janus, Scudder and many other firms do not share a load with brokers or advisors and don’t issue different share classes. Most no-load and load funds earn most of their money by charging an ongoing annual expense fee as a percentage of assets.)

Once you get past American’s front-end loads, which run 4.75% on bond funds and 5.75% on stock portfolios, the company’s products are inexpensive. Almost all of the American portfolios have annual expense charges of less than 1% a year. The median cost is about 0.75%--equal to just $7.50 a year for each $1,000 invested.

Low expenses generally translate into good performance. Two-thirds of the funds in the American family enjoy above-average ratings by Morningstar Inc. of Chicago.

It’s difficult to make a blanket statement that A shares--those carrying a full front-end load--are more or less costly than B or C shares. The analysis depends on each fund’s performance, an investor’s holding period and other factors.

Because of the front-end charge, A shares tend to be poor choices for short-term investors. But A shares also carry low ongoing expenses, which means they become more attractive over time. Also, some buyers can reduce the front-end charge by investing large amounts of cash, typically $100,000 and more.

B shares, by contrast, typically feature higher ongoing expenses and no front-end charge. Over time, they tend to be more costly choices, although most firms will automatically convert a person’s B shares into A shares after five to eight years. B shares include a declining back-end load.

C shares feature higher ongoing costs, often with a small front-end charge. They’re often best for people who plan to invest for only a few years. B and C shares represent a sort of Faustian trade-off, whereby investors pay lower charges initially but potentially higher expenses over time.

American Funds’ proposal doesn’t include pricing system details, but existing shareholders won’t be affected. These people already have paid a sales charge, so their holdings will be grandfathered in as A shares.

Is this good news for investors? Two key points are worth remembering about mutual fund charges:

* Funds sold through a broker or financial planner in the form of a share class probably have extra costs embedded somewhere, even if they doesn’t show up as front-end charges. The planners need to be paid.

* The existence of share classes doesn’t affect the investments held. That is, A-share investors own the same underlying portfolio of stocks or bonds as people who have opted for the B or C shares.

*

Russ Wiles is a regular contributor to The Times.