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Fund Times: Dreyfus Drops B Shares

Plus, news on Fidelity, American Century, T. Rowe Price, and more.

Morningstar Analysts, 03/03/2006

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Two new developments may spark trends that will lead to clarity on fees paid by fund investors. Dreyfus has eliminated sales of B shares, and Lehman Brothers is reportedly moving ahead with efforts to unbundle brokerage commissions from research.

Dreyfus' move to eliminate sales of B shares makes it the second fund company to do so. Franklin-Templeton eliminated B share sales in 2005. The moves help to ensure that investors understand what they're paying in commissions. B shares are designed to take the traditional front-load commission and spread it out over time through the expense ratio. Depending on their design and the timeframe involved, some B share purchases can produce equivalent, or even better, results for shareholders.

However, few B share structures fit that description, and overall, their sale has opened up a Pandora's box for abuses by brokers. The simplest problem that B shares create is that many investors think that they didn't pay a commission and got no-load shares because they didn't pay an up-front fee. Sometimes, this was simply a matter of confusion, and other times it was a result of deliberate deception.

Another common abuse has been that brokers eager to capture the highest commission possible have sometimes put clients in B shares when they would have been entitled to lower commissions had they bought A shares. Fund companies include commission breakpoints with A shares so that investors buying large sums pay a reduced commission or no commission at all.

For example, a fund might cut the load in half for an investor buying $500,000 or more. But some brokers have been caught putting clients in B shares (which don't have a way of reducing commissions) when they have more than that amount. In some cases, brokers would fill multiple orders just below the $500,000 level in order to avoid detection.

The NASD has brought a number of enforcement actions against brokers who took such actions. In addition, brokerage firms and fund companies alike have become more vigilant in policing sales of B shares. A number of fund companies have also lowered the maximum amount allowed in B shares in order to make abuses much more difficult.

The moves by Franklin and Dreyfus are good news for fund investors, because it's easier to understand the commission in A shares and investors are generally less susceptible to abusive sales practices.

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