My Edward Jones ROTH IRA Account Is Invested Nn B Shares – Is That Good?

So I met with my Edward Jones rep 2 weeks ago and he informed me that my ROTH IRA is being invested 100% in NPFBX. Keep in mind, 9 months ago, my goal was to just get a ROTH IRA started again. Now that I’m a bit futher along in my journey, I figured I’d dig in on exactly what I’m was putting cash in to; starting with my 401k, and now on to my ROTH.

So obviously the first step was to assess the fund NPFBX; it looks like a good fund, over the last 5 years it has gone up 15+ points, has a decent expense ratio (1.48%) and is a 3-star on Morningstar. With my 401k I have been trying to keep the expense ratios low, and the Morningstar ratings at 4 or 5 star, so that is was initially got on my bad side. Investingating further I figured ask my rep why he’s got me in the “B” shares as opposed to the “A” shares. It essentially comes down to him telling me that he wants me to “stay in the market” for 5-10 years. I agree, I want to stay in for the long haul for sure.

So I figure we’re on the same page. So I ask him about the 5.00% back-end load the fund charges with the “B” shares. He tells me that I don’t have to worry about it if I plan on staying in the for the long haul, because I WILL be in the market for 5+ years. The “B” shares have a step down structure to keep me in the fund for at least 5 years. After this year, the back-end load will drop to about 4.25%, the next year to 3.25%, then 2.25% and 1.25% in the final year, and in the 6th year, my shares will be converted to “A” shares. That doesn’t sound too bad, does it?

Well, actually it does sound bad. Right now (Nove 28, 2007 @ 2:50pmPST) the “A” shares of American Funds New Perspective (ANWPX) are selling at 36.32 vs 35.51 for the “B” shares (NPFBX). They are invested in exactly the same setup of a LargeCap Blend, but with a few key differences:
1. The expense ratio on the “A” shares is 0.71% vs the “B” share of 1.48%.
2. The Overall Morningstar rating of “A” shares is 4star, vs. the 3star of “B” shares.
3. The “A” share has a frontload of 5.75%, which isn’t cool, and the “B” share has the deffered ladder dropping from 5.00%, which also isn’t cool.

I’m starting to not like the fund more and more. But I figure I’ll give it the benefit of the doubt and research a little deeper to see what I can find. What is the real difference between the “A” shares and “B” shares. Isn’t it difficult enough to find what mutual funds in general to invest in? And now on top of it I have to decided, after I choose a fund, what type of shares I want? How does that work? So I did some more digging…

From the International Herald Tribune, they say the rule of thumb for shares is as follows:

A, or front-load, shares are the least costly way to own a fund, provided the investor is long-term;

B, or back-load, shares are more likely to fit a five- to seven-year time frame;

C, or level-load, shares are for short-term investors who like to trade in and out of funds.

Makes sense, but why deal with it?

Other investors take their business to fee-only advisers, who recommend portfolios of no-load funds, often with other financial-planning advice. These advisers are paid not by a fund company, but by the client. Typically, the fee is equivalent to a percentage of the client’s assets.

Not surprisingly, the array of options has left many investors at a loss as to whom they should pay, how they should pay, and for what.

I did some more digging on the differences between “A”, “B”, and “C” shares and actually found an article directly FROM an Edward Jones associate where he says:

In the US “a” share funds have a maximum 5% initial commission and a annual expense fee. “B” shares have a zero initial commission, typically a 7 year holding period and a higher annual expense fee than “a” shares. “C” shares have no initial commission, one year or less holding period and a higher annual expense fee than “a” shares.

Our [Edward Jones] feeling is that our customer at Edward Jones, the serious long term investor, is better off buying “a” share funds, paying the one time commission and getting the lower annual expense fee. Our average client holds a mutual fund 18 years. It makes good economic sense for them to hold the A shares.

In Canada because “a” share front load commissions are fully negotiable, there really isn’t the equivalent of the US “c” share.

Also, most fund groups in Canada charge the same annual expenses for their “a” or “b” shares. ie; xyz fund company Canadian growth fund A and B shares have the same annual expense charge.

The savings the fund company has on the A shares vs B shares, because they don’t have to fund the salespersons commission on A shares, like they do on B shares, they pay out in the form of a higher trailing commission to the salesperson on the A shares.

The key piece I see there is the last paragraph where he says that the FUND COMPANY (American Funds) doesn’t have to pay the seller of the share (Edward Jones rep) when they buy the “A” share. When the customer buys the “B” share, they’re paying the Edward Jones rep as well when you buy that.

AH HA! So I’m buying into the “B” shares from my reps perspective to “stay in the market for the long haul”, but in actuality, I’m buying into “B” shares to hook him up with a few extra $ off me that he’s getting instead of applying it to my best interests. A handy way of hiding it I guess.

So the next step I decided to do was to cut off the $ being sent to him and get out of that fund ASAP. But, as I’ve already invested almost $2,000 this year and it is the first year I am in it, I am going to be charged the 5% back-end load to get OUT of the fund now. Well crap, right? Not necessarily, I can just stop funding this ROTH IRA account, keep the $2,000 in there, and wait for 5 years to go by before they’re turned into “A” shares (at which time the 5.75% front load doesn’t matter, because I’ve already been in the fund before and road the step ladder from “B” share-land.

Is it worth it though to stay in for those 5 years with the 1.48% (NPFBX) expense ratio, and miss out on the 0.71% (ANWPX) expense ratio from being out of the “A” share box? Well, let’s run the numbers:
1. 1.48% of $2,000 over 5 years raking a modest 10% return would mean 8.52% real return putting it at about $3,007 over 5 years (not adding any more).
2. 0.71% of $2000 over 5 years raking a modest 10% return would mean 9.29% real return putting it at about $3,120 over 5 years (not addign any more).

No HUGE deal, $113.00 saving over the 5 years to be in the “A” share bucket, but still, that’s $113 I could put to work elsewhere. So it is probably no HUGE skin off my back to keep it in there, but I need to realize that if I were to leave that in there until retirement in 40 years for me, that $113 without adding anything more would relate to $70,119 in the “A” shares, and $52, 266 for “B” shares over that timeframe meaning $17,853 whittled away on fees for being in the “B” bucket. Furthermore, if I take out the $2000 I have in there now, I’m going to be giving the fund another 5% getting out now and giving them another $100 to pull it out and go elsewhere, ugh. I figure the best way around it is to keep the $ in there, keep the financial advisor assistance (whatever he DOES give) on board and wait 5 years to let that $ simmer. If nothing else, I keep the rep honest and onboard at the same time if I have other questions.

Right now that $2000 wasjust a bad decision overall, but a good decision to get back into the ROTH IRA realm. I should have looked elsewhere before jumping, but I jumped and ultimately this is water under the bridge, and can be tacked on to my “bad decisions I’ve made investing“. I’ll not let it happen again. I’m going to stop payments to that Edward Jones account and open up my own ROTH IRA elsewhere, and contribute, at least the rest of my ROTH amount for this year in that bucket, and heading forward doing the same. I am going to let the Edward Jones pot boil over the next 5 years, and open another ROTH likely with Charles Schwab. More on that later…

Filed Under: 401K • advice • financial education • Investing • Mutual Funds • Net Worth • Portfolio • Retirement • ROTH IRA • Uncategorized