No Load Shares Increasingly Dominate Mutual Fund Sales, New Strategic Insight Study Finds

May 31, 2011 - PRLog -- No Load share classes, particularly those without 12b-1 fees, have grown to become the single most important share class in mutual fund sales through intermediaries, according to a new study by Strategic Insight, a business intelligence provider to the worldwide fund industry.

No Load shares accounted for 47% of total fund sales during 2010 among managers primarily selling through financial advisors, rising significantly from 42% in 2009 and just 34% in 2007. Behind the 47% of sales for No Load shares, the next-biggest share class in 2010 was “A” shares sold at NAV, which accounted for 28% of mutual fund sales through intermediaries in 2010. Traditional “A” shares sold with a commission came in third, with 14% of fund sales through intermediaries in 2010 (and just 6% of this total via high commission “A” shares – with 4% or greater sales load).

Much of No Load shares’ recent growth has come from fee-based advisory programs, which have seen demand shift rapidly toward the lowest-cost share classes. During 2010, No Load shares made up 60% of total Fee-Based Advisory Program sales, up from 41% in 2008. Within these numbers, 83% of such No Load share sales within fee-based programs in 2010 came via share classes without 12b-1 fees (up from 72% in 2009).

These findings come from SI’s new report, “The Strategic Insight 2010 Fund Sales Survey: Perspectives on Intermediary Sales by Distribution Channel and Share Class.” The study was based on SI’s proprietary survey of 40 fund firms that distribute primarily through financial advisors. Survey participants managed in aggregate $4.4 trillion in U.S. open-end stock and bond fund assets as of the end of 2010, representing 56% of industry long-term fund assets.

“Clearly, the movement toward advisors being compensated through fees-for-advice has been an important secular trend impacting fund sales for some time,” said Strategic Insight senior analyst Dennis Bowden, the report’s lead author. “More recently, the growing demand for the lowest-cost share class within fee-based programs has added new dynamics to this trend.”

“In many cases, this demand has led to traditionally institutional share classes being made available to retail investors and advisors within fee-based programs,” said Mr. Bowden. “And for fund firms, meeting the costs of retail distribution with share classes that were originally priced for institutional use can create challenges.”

As fee-based advisory programs continue to grow in importance, these trends in share class use also carry important implications regarding overall shareholder costs and potential Rule 12b-1 reform.

“The findings of this SI study, in particular the significant and on-going reduction in the use of share classes charging 12b-1 fees, raise the question of whether marketplace forces are reducing, if not eliminating, the need for a radical remake of Rule 12b-1,” said Avi Nachmany, Director of Research at Strategic Insight.

Related key sales trends from our study:

•   Sales of No Load shares in total grew by 25% on an absolute basis in 2010 among firms selling primarily through financial advisors – the fastest growth rate of any share class.

•   “A” share sales continued to decline among our peer group of managers – falling from 46% of total fund sales in 2007 to 38% in 2010. Within “A” share sales, “A” shares sold at NAV (without a front-end sales load, but generally carrying a 12b-1 fee of 0.25%) declined from 33% of total fund sales in 2008 to 28% in 2010.

•   Increasing sales via fee-based programs spurred No Load shares’ overall growth, partly at the expense of “A” shares sold at NAV (without a front-end sales load, but generally carrying a 12b-1 fee of 0.25%). Within fee-based advisory programs, “A” shares at NAV have declined from 59% of sales in 2008 to 40% in 2010.

•   Aggregate Fee-Based Advisory Program sales, which span across several standalone distribution channels, accounted for 37% of total fund sales in 2010 among firms selling primarily through financial advisors, up from 34% in 2009. On an absolute basis, Fee-Based Advisory Program sales grew by 30% in 2010, a faster rate than any standalone channel captured in our study.

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Strategic Insight, an Asset International company, is a leading research firm for the mutual fund and wealth management industry, providing clients with in-depth studies, consultation, and electronic decision support systems.