Morningstar Advisor - Summer 2007 - (Page 29)

Hands On Finding the Suitable Fund Share Class for Your Client Investment amount Share class Holding period (years) 1 3 5 10 20 $10,000 A B C 0% 0% 100% 0% 0% 100% 0% 0% 100% 1% 0% 99% 1% 0% 99% 1% 0% 99% 2% 0% 98% 11% 0% 89% 5% 3% 92% 7% 3% 90% 55% 2% 43% 93% 1% 6% 64% 35% 1% 86% 14% 0% 98% 2% 0% 99% 1% 0% 66% 34% 0% 86% 14% 0% 98% 2% 0% 99% 1% 0% $50,000 A B C $100,000 A B C $250,000 A B C Percentage of winning share classes, by investment amount and holding period. Welcome to Hands On, a place for do-it-yourself professionals who want to roll up their sleeves to do their own investing research. Through a combination of examples and analytics, we show you how to tackle complex issues. We also highlight parts of Morningstar’s tools that can help your perform these tasks. In this issue of Morningstar Advisor, the spotlight is on suitability. So far, we’ve discussed suitability in the context of client profiles and variable annuities. In Hands On, we will focus on how to find the most appropriate mutual fund share class for your clients—a subject that has grown more complicated over the years. Advisors who rely on broad guidelines—such as not putting clients into a B share if they have more than $50,000 to invest—may make recommendations based on imprecise information. Fund companies now offer a wide array of share-class types, and there is little standardization among share classes from fund to fund. A 2006 Morningstar study confirmed how complicated share class suitability has become. The study found that A, B, and C share classes all had a place in investment recommendations. It is no surprise that C shares are often the best choice for short-term holding periods and that A shares are better over long time horizons. The study also found, however, that B shares were the best option in some funds across all investment amounts for holding periods of five years or more. For example, as the above chart shows, the study found that for a 10-year holding period the B shares of 14% of funds analyzed by Morningstar were the best option for a $50,000 investment, and B shares in 2% of the cases were the optimal class for $100,000 investment amounts. While 2% may not seem like much, it indicates that advisors would be giving the wrong advice if they recommended A shares in this situation. Overall, the Morningstar study confirmed that investment amount, holding period, fees, and breakpoint limits all need to be factored in to determine the appropriate share class for each situation. The best advice is to avoid generalizations and rely on specific information to make appropriate decisions case by case. But how does one gather specific suitability information? MorningstarAdvisor.com 29 http://www.morningstaradvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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