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Finance: What is a Contingent Deferred Sales Charge? 10 Views


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What is a Contingent Deferred Sales Charge? A Contingent Deferred Sales Charge is a fancy name for a back load fee for mutual fund B shares. Basically, A shares pay a fee at the front when purchased, while with B shares, there is no front load, but a fee when you sell. Either way, they get you coming or going.

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Transcript

00:00

Finance a la shmoop. What is a contingent deferred sales charge? Urgh, mouthful all

00:10

right well when you buy any flavor of mutual fund you're paying fees that go [Selection of ice creams with mutual fund labels]

00:14

to your broker. How you pay these fees which are called loads or commissions,

00:20

depends on the type of mutual fund you have and the way you're buying it. [Table of mutual fund types and share types]

00:25

A-shares have a front end load. They're the traditional format in which the sale

00:30

of a mutual fund gets commissioned. Meaning you pay your fees to the selling

00:34

broker when you buy. So on an individual share sale like at a net asset value in

00:40

a mutual fund well you might pay $14.68 for a [The price is highlighted]

00:44

share of that mutual fund but net of commission well you start out

00:48

compounding your investment at a value of 14 dollars and 37 cents like you paid [The compounded investment is highlighted]

00:53

31 cents there in commission. All right next up B-shares, well B-shares carry

00:59

what is called a contingent deferred sales charge. That's fancy nomenclature

01:05

for quote no-load unquote kinda-sorta in fact what's going on is that the load or [Money going from you to the mutual fund]

01:10

commission is paid by the management company responsible for buying and [Money going from the management company to the broker]

01:14

selling shares inside of the mutual fund rather than by an upfront sales charge.

01:19

Like each year they're essentially paying off the broker his commission for [The management company paying the broker]

01:24

selling you that share of the fund, so your fee structure when you pay your

01:27

commission upfront might be that the fund costs you one percent a year to be

01:31

managed but if you opt for B shares with no commission upfront your annual

01:36

fee might be something close to 1.5 percent per year and as long as you hold [The annual fees of each share type are shown]

01:42

the mutual fund well say eight years or more, well then you will be

01:46

considered to have paid your commission in the form of the extra half a percent [Chart showing the comission prices of both share types being the same after 8 years]

01:51

per year that you were charged in these forms of B-shares and if you do the math

01:56

you're likely getting a way better deal to just pay your commission upfront and

02:01

take the lower fee going forward and remember that contingent thing in there? [The word contingent is circled in the video question]

02:06

Well the no-load status of your fund is contingent on you owning

02:11

the fund long enough so that the high management fees each year can then go to [Management company paying the broker each year]

02:16

pay off the broker if you sell your fund early well then you'll be charged extra

02:20

as you exit right. Remember that over time the stock market goes up a lot

02:25

usually so why would you want to pay a percentage of your likely increasing [Stock price chart going up]

02:29

asset-based annually in the form of higher fee structures rather than lower

02:35

fee structures year after year yeah usually financially this doesn't make [Mutual fund performance chart showing increasing value]

02:39

sense. So the term here revolves around the notion that your sales charge ie

02:43

your commission will have been deferred under the B share structure and the [Deferred stamp]

02:47

amount you pay is contingent upon how long you hold the shares and pay the

02:50

likely much higher fees annually rather than just biting the bullet up front.

02:54

Just as in baseball there's no free lunch in the land of mutual fund buying. [Waiter bring the bill for a guys food]

02:59

Yeah, bottom line, do the math.

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