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Introduction and Overview of 40 Act Liquid Alternative Funds
There are two types of institutional share classes
that are not available to retail investors. The first is
sold directly from the product manufacturer to an
institution and is often known as the “Y” share class.
The second is sold to wealth advisers who either have
clients able to afford the large minimum purchase
size (usually $5,000,000) or who have discretion
over their client portfolios and can allocate a block
purchase out across their set of accounts.
Institutional investors include banks, pension funds,
insurance companies and investment funds. There
is typically no load or trailer fees applied to an
institutional share class and if the institution is buying
directly from the product manufacturer, there may
be no platform, marketing or 12(b)-1 fees. This is the
lowest cost mutual fund product, and total fees may
often approach 1.0% to 1.5% prior to other expenses.
If a wealth adviser is purchasing these shares, there
is usually a platform fee of 40 basis points, and some
marketing fees included in the cost of the fund.
There is also typically a one-time listing fee that the
investment adviser pays to get onto the platform.
The fees on these products can range from 1.00% to
2.15% on an ongoing basis. Chart 8 illustrates the set
of fees associated with the institutional share classes.
The least expensive share class that can be accessed
by the retail audience is the “C” share class. These
share classes have a “level” load; i.e., they do not
charge a front-end load and their trail is quite small,
typically at 1.00%. That deferred load also vanishes if
the investor holds the mutual fund for at least 1 year.
The 12(b)-1 fees on these products can be quite large,
however, making for a high overall expense ratio on
the fund. This share class is favored by distributors
that have entered into sub-advisery relationships
with investment advisers in order to have them
create products exclusively for their platform. Costs
associated with promoting these products may be
quite high, which is why the expense ratio can be so
large. Broker-dealers with their own product platform
(such as Merrill Lynch and Smith Barney) or a direct
distributor (such as New York Life) are most likely to
offer “C” shares.
By contrast, both Class B and Class A mutual fund
shares are typically used by platforms that are
directly accessed by retail buyers, such as mutual
fund supermarkets or discount trading platforms.
Class A shares have a front-end load that can be quite
high, at times as much as 4.0% to 5.0% of the fund’s
value. They also have ongoing 12(b)-1 or marketing
Chart 8: Illustrative Open-End Mutual Fund Share Classes
Chart 8
Institutional
“Y”
Adviser
“I”
“C”
Shares
“A”
Shares
Paid to
Distributor
Paid to
Investment
Manager &
Split with
Sub-Advisers
Paid by
Investment
Manager
One-Time
Listing Fees
Share
Classes
Management
Fees
Platform
Fees
12(b)-1
Fees
Trail
Front-End
Load
Back-End
Load
“B”
Shares
Illustrative Open-End Mutual Fund Share Classes
50-150
Basis
Points
50-150
Basis
Points
20 BPs
40 BPs
25 BPs
20 BPs
20 BPs
20 BPs
100-
125 BPs
Including
12(b)-1
Fees
500 BPs
or More
Including
12(b)-1
Fees -
Break
Points
for Large
Tickets
500 BPs
or More
Including
12(b)-1
Fees but
Load Drops
as Shares
Mature -
No Break
Points
50-150
Basis
Points
50-150
Basis
Points
50-150
Basis
Points