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

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

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

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

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

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

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

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

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

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

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

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

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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]

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

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

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

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

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

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

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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]

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

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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]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Yeah, bottom line, do the math.

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