The debate about high mutual fund commissions and conflicts at the point of sale should be put to bed because sales of funds with high upfront commissions are a small part of overall sales, according to a recently released report.
Among fund groups that sell primarily through broker-dealers, only about 15% of total sales last year were in A shares that had upfront loads of 4% or more, according to a survey by Strategic Insight Mutual Fund Research and Consulting LLC of New York.
The median firm in the survey got just 6% of its sales from higher commission A shares.
Strategic Insight released its results last month.
Sales of B shares made up just 2% of total new sales last year, the survey showed.
The findings show the "obsolescence" of the debate about high fund commissions and point-of-sale conflicts, Strategic Insight said in an accompanying report.
"More and more [fund sales are] done through some form of an assembled advice [offering] or platform," such as mutual fund wrap programs and retirement plans, said Avi Nachmany, Strategic Insight's director of research.
Mutual funds in those platforms are either traditional no-loads or load-waived A shares, he said.
Strategic Insight's study was based on a survey of 36 fund firms that distribute primarily through brokerage firms. In total, survey respondents manage 52% of U.S. open-end stock and bond fund assets.
Respondents included virtually all the large broker-sold fund companies, Mr. Nachmany said.
Twenty of the firms broke out A-share sales based on the size of the load. According to Mr. Nachmany, those 20 firms provided enough data to project a breakdown of A-share loads for the industry overall.
The survey was the first time anyone has tried to determine a breakdown of A-share sales based on the size of sales loads, he said.
Normally, aggregate A-share sales data lump together all such sales, whether sold at net asset value, at breakpoint discounts or at full commission.
Strategic Insight's findings are valid, but there's "still some conflict there" at the point of sale, said Don Phillips, managing director at Morningstar Inc. of Chicago.
Small investors buying funds on their own "are not getting any of the breakpoints" and face a variety of fully loaded share classes, he said. "That's their reality."
The Strategic Insight survey found that A-share sales accounted for 43% of sales at the surveyed firms. But 57% of that portion was done at NAV, the report said.
What's more, that 43% figure was skewed by a few large "outlying" firms that have significant sales of A shares, the report said.
Mr. Nachmany declined to confirm if one of those outlying firms was American Funds, advised by Capital Research and Management Co. of Los Angeles. American is the No. 2 U.S. fund company in sales and the largest in assets.
About half of American's sales are in A shares, according to Chuck Freadhoff, a company spokesman.
For the median firm in the survey, A shares accounted for just 20% of sales, Strategic Insight said.
Separately, data from the Investment Company Institute of Washington also show the declining importance of A shares.
Last year, the net new cash flow into funds that charge 1% or more in upfront loads was $28 billion, just 12.5% of flows into all long-term funds, according to ICI data. That was about half the level from the prior three years.
Strategic Insight found that the median firm in its survey experienced no-load sales growth of 28% last year, the greatest year-to-year jump among all share classes.
The median firm experienced C-share sales growth of 15%.
By contrast, high-commission A-share sales declined 6% at the median firm in the survey, though aggregate sales rose. These were funds with upfront loads of 4% or higher.
Advisers were likely using C shares as a substitute for other fee-based relationships, according to Strategic Insight.
In its report, Strategic Insight also suggested that Morningstar stop factoring in loads in calculating its star ratings. Morningstar subtracts the maximum sales commission in calculating its star ratings.
In 2005, Morningstar also began calculating a load-waived rating.
Morningstar agrees that more funds were sold at NAV, Mr. Phillips said, and "that's why we came out with our load-waived ratings." He added, though, that factoring in loads reflects the experience of many small investors and puts pressure on the industry to reduce costs.
Lipper Inc. of New York doesn't factor in loads in its fund rankings.
"We're judging the manager's skill," said Jeff Tjornehoj, a Denver-based senior analyst with Lipper.
E-mail Dan Jamieson at [email protected].
