Nearly one of every $5 that went into mutual funds last year flowed into ones that charge a sales load, compensating a broker or planner...

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Nearly one of every $5 that went into mutual funds last year flowed into ones that charge a sales load, compensating a broker or planner for making the sale.

But a new study from the University of Michigan indicates investors who pay for financial help may want to avoid load funds, because they carry a surprising cost beyond the sales fees. The Michigan study showed that when a mutual fund adds additional share classes — coming up with new ways for brokers and planners to pitch the product to customers — performance tends to suffer.

Mutual funds sold through brokers use different share classes to give investors options. Each class carries some form of cost that goes to pay for the help of an adviser.

Class A shares carry the traditional front-end load, so that a percentage of the purchase goes straight to pay for the broker or planner selling the fund. Most experts consider the upfront sales charge the best option for long-term investors who are buying a fund and plan to hang on for five or more years.

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B shares, by comparison, have no upfront load but levy a 12b-1 fee — for sales and marketing — that jacks up costs and pays for the adviser’s services.

Class C shares have no front-end load but carry a high 12b-1 fee — often the maximum 1 percent — in perpetuity.

“When a firm creates B and C shares, it is imposing liquidity costs on the portfolio,” says Lu Zheng, the Michigan professor who conducted the study with Vikram Nanda and Z. Jay Wang. Zheng noted the study examined all diversified domestic equity funds from 1993 to 2000, by which time nearly half of all loaded funds had more than one share class.

“The additional money that comes in at first is good, but after two years, we found that multiple-class funds underperform no-load counterparts by about 1.5 percent annually. That’s a big price to pay.”

Zheng’s advice was for investors to switch to no-load funds, but that is not a realistic choice for many load-fund investors. After all, they paid for financial advice, in large measure because they were not comfortable building a portfolio on their own.

But for investors who are looking to hire a financial adviser, the implication is that fee-only advice — where the customer pays a flat fee, typically about 1 percent of assets under management — might be a better alternative than paying sales charges. The adviser gets compensated but puts the investor into no-load funds.

The investor should calculate the overall cost of owning the funds — once the advisory fee is factored in, it is possible that no-load-plus adviser will be more expensive — but Zheng said the cost of buying a fund with multiple share classes should not be ignored.

“The positives of adding share classes are more options to choose from, and that you get the advice you pay for,” Zheng says, “but the downside is an impact on overall performance, so people need to be sure they are comfortable with the cost of owning funds this way.”

Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.