The financial services landscape is an ever-changing environment. The mutual fund industry, in particular, has been in the spotlight in recent years, with questions around the cost and value of offerings. Regulatory pressure has also made headlines. The collective attention has led to changes, and has also raised questions about the future of such funds.

Industry Changes

Massachusetts Investors Trust, the world’s first mutual fund, was unveiled by MFS Investment Management in 1924. That fund is still sold today. While mutual funds have a long legacy and lasting staying power, they have faced challenges over the years, undergone changes and will no doubt continue to do so.

Mutual share classes are a case in point. There are two main types of share classes: load funds and no-load funds. Load funds come in three primary share classes: A shares, B shares and C shares. Ongoing developments in the industry have put pressure on all of these, particularly B shares and C shares.

Goodbye to Bs
B shares were once considered a hot commodity for the financial services industry. Financial advisors liked them because they generally had higher management expense ratios (MER) compared to other funds within the same family, making them more profitable to sell. Investors liked them because, unlike A shares, they were not subject to an initial front end-load. However, in 2008 and the Financial Industry Regulatory Authority (FINRA) issued an investor alert titled "Class B Mutual Fund Shares: Do They Make the Grade?"

In its own words, FINRA issued the alert "because we are concerned that some investors may purchase Class B mutual fund shares when it would have been more cost effective for those investors to purchase a different class of shares." The alert was another manifestation of the ongoing concern that many investors would become enticed by the lack of up-front costs, only to realize charges once they tried to cash out. On the other side of the coin, B shares provide the advantage of using your entire investment to gain market exposure rather than paying towards upfront fees.

Sales of B shares have been in decline and many mutual fund firms are moving away from them, with big-name firms including Goldman Sachs, PIMCO, American Century and many other financial institutions dropping B shares from their product lineups.

The Great Recession reduced investment returns, making the complex fee structure of B shares less attractive to fund companies. B shares became a significantly less valuable product from a seller's point of view. Pressure on the fund industry to reduce fees in light of poor performance, competition from low-cost ETFs and pressure from regulators add fuel to the fire.

Writing on the Wall for C Shares?
The future of C shares may also be questionable, as they usually have a higher management expense ratio than other mutual funds in the same fund family. A combination of regulatory pressure and concerns about fees may make it difficult to justify selling clients expensive C shares when less expensive shares of the same fund are available.

Give me an "A"
A shares are the least expensive of the traditional load-fund fund share classes. They are also the least complicated. There are no back-end loads and no graduated pricing structures that reduce the cost to investors based on how long the investment is held. That noted, there are less expensive share classes available.

No-Loads

No-load funds offer a wide variety of investment strategies at lower prices than those typically charged by load funds. These less expensive shares are popular among do-it-yourself investors and are also used by some financial advisors. Of course, no-load funds face challenges too. Recently, regulatory attention has centered on money market funds and their traditional positioning as stable, cash-like investments that maintain a $1 per share net asset value. Proposals to let the share price float, moving up and down like the share prices of equity funds, could result in changes to how fund companies and investors view these funds. Cost pressure exists in the no-load area too, as investors seek to reduce expenses.

Exchange-traded Funds

ETFs offer a low-cost investment alternative that is fiercely competing with mutual funds. Still, despite all the attention they have attracted, there are only a little over 1,200 ETFs in the marketplace versus more than 8,700 mutual funds, according to the Investment Company Institute.(If you're an investor who likes to understand how and why your investment products work, An Inside Look At ETF Construction provides a close-up look at the popular, inexpensive portfolios, and Active Vs. Passive ETF Investing explains how you can use these securities for more than just indexing.)

The Bottom Line
The rise and fall of B shares and the development of ETFs highlight the dynamic nature of the financial services industry. New products are developed and old products are enhanced or eliminated based on a mix of market-moving forces, including supply and demand, the regulatory environment, and the performance of the products and the financial markets in general. Despite these changes, mutual funds remain quite popular. In the United States, where innovation in the investment industry is commonplace and the focus on cost containment intense, assets in “registered investment companies”(which includes mutual funds and ETFs) surpassed $13 trillion at the close of 2012 and set a new record with a year-end close of $14.7 trillion. Of that number, just $1.3 trillion was accounted for by ETFs. (Source: http://www.icifactbook.org/)

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