Advisers Say To ‘B’ Patient

For the past couple of years, as investors threw hundreds of billions into stock mutual funds, many bought shares with “rear loads” from their brokers because they didn’t want to reduce their investment by paying upfront commissions.

Now, as many worry that a correction is overdue in the still-booming bull market, there are some who believe that investors holding rear-load shares, also called “B” shares, might be more likely to ride it out than those who paid upfront commissions.

“A” shares are the same portfolio of securities but the commission is paid as a frontload, reducing your investment by the amount of commission paid at purchase. A $10,000 investment with a 5 percent commission would put only $9,500 to work for you.

With B shares, known also as contingent-deferred sales-charge shares, there is no upfront commission so the entire $10,000 is invested right away. But if you withdraw the money within a specified period, you pay an exit fee, based not only on your initial investment but also on any earnings. That commission often runs 6 percent if you withdraw in the first year, 5 percent the next, then 1 percentage point less in each subsequent year.

“Some of the data indicates that after the (1987) crash, B-share retention was pretty good,” said Jessica Bibliowicz, executive vice president in charge of Smith Barney Mutual Funds. “It seems that investors didn’t want to pay a commission on top of losing money, and they stick around. It is a source of discipline.”

Bibliowicz said B shares, which account for about 10 percent of all mutual fund money, have become the predominant form of investment for many portfolios primarily because “investors don’t want to pay upfront commissions. They want to see all their money go to work.”

Joseph Clinard, a broker and financial planner in Melville, N.Y., said he urges clients to buy B shares for precisely that reason. “Psychologically, people don’t want to see their money reduced by sales charges before they invest,” he said.

But Louis Harvey, president of Dalbar Inc., said a survey on why people with B shares stayed in bond funds longer than those who held A shares during the 1994 bond fund debacle found that “the broker, not the investor, was the driver. It is really up to the broker to advise an investor to stay in. I don’t know that being in B shares and facing a commission was a deterrent to getting out.”