What is a Mutual Fund?
Mutual funds are shareholder owned investment vehicles which invest in stocks, bonds and other assets or some combination of these assets. There are thousands of funds in existence, designed to meet a variety of investment objectives. Of course, there is no assurance that a particular fund will achieve its objectives. Your investment in a fund may lose value.
Mutual Fund Share Classes
Generally, mutual funds are purchased in A, B and C share classes, although there are other classes which also may be appropriate. When making your decision about which share class best meets your investment objectives, you should consider your individual financial situation as well as your investment time horizon.
Class A Shares
Class A shares are typically characterized by a “front-end” sales load. This refers to the charge which is paid by the investor. This amount is expressed as a percentage of a fund’s public offering price. Sales charges are typically 4.50% for fixed-income funds and 5.75% for equity funds. For larger investments, discounts known as breakpoints, discussed below, may reduce the sales charge. Once the sales charge has been deducted, the remaining amount is invested in the fund. In addition to front-end sales loads, investors in mutual fund Class A shares will pay ongoing expenses levied by the funds, including 12b-1 fees, also explained in this document.
Class B Shares
Class B shares carry higher ongoing expenses than Class A shares. These expenses will reduce your returns by the amount they exceed the ongoing expenses of Class A shares. Class B share expenses are usually 0.50% to 0.75% per annum higher than those of Class A shares. Class B shares are not assessed a front-end sales charge, allowing the entire purchase to be invested in the fund. However, if you redeem your investment within a prescribed time period, you will be assessed a “back-end” charge called a “Contingent Deferred Sales Charge” CDSC. CDSC periods usually expire in four to seven years. The maximum amount of the CDSC is usually between 3.50% and 5.00% and declines the longer you hold your shares. Often when the CDSC period expires, your shares “convert” from Class B to Class A. This conversion allows you to pay a lower ongoing expense.
Class C Share
Class C Shares charge higher ongoing expenses than Class A shares. Class C shares usually are not assessed a front-end sales charge, but charge a CDSC if you decide to redeem your investment within a short time period, typically the first 12 to 18 months of ownership. CDSCs for Class C shares are usually 1.00%. Class C shares do not “convert” to Class A shares. Typically, among Class A, B and C shares, Class C shares have the highest internal expenses. These higher expenses will reduce your returns.
Annual Operating Expenses
All funds have annual fund operating expenses. These are not paid directly by the investor, but they are taken out of the fund’s assets. These expenses include:
• Management Fees - these are amounts paid to the fund’s investment advisor for portfolio management and other services.
• A 12b-1 fee - this is an expense charged by some mutual funds to cover promotion, distributions, marketing expenses and sometimes commissions to Financial Advisors.
Making An Appropriate Choice
Understanding the basic principles of mutual fund share classes is the first step in making an appropriate share class choice. Not all funds have the same policies; therefore, before investing, it is essential to always read the fund’s prospectus which outlines the specific information concerning fees and expenses.
Class A shares may be appropriate for:
• Investors who would qualify for volume discounts referred to as breakpoints.
• Those who expect to be long-term investors, because the longer you hold these shares, the greater the potential benefit when compared to B or C shares.
Class B shares may be appropriate for:
• Investors who intend to hold their investment for longer time periods.
• Investors who want all of their money invested immediately.
• Investors who do not qualify for volume discounts.
Class C shares may be appropriate for:
• Investors who intend to hold their investment for a short time period.
• Investors who want all of their money invested immediately.
• Investors who do not qualify for volume discounts.
Depending on share class, mutual funds often offer volume discounts on front-end sales charges for larger investments. The investment levels at which the discounts become available are called “breakpoints.” When your initial mutual fund investment exceeds a specified amount, or breakpoint, you may qualify for a volume discount. For example, an investment of $49,500 in mutual fund shares may incur a front-end sales charge of 5.75% or $2,846.25, while an investment of $50,000 may incur a sales charge of 4.50% or $2,250.00. In this example, by choosing to invest $500 more, and realizing a lower sales charge, $596.25 more would be invested in the fund. Typically there are several breakpoints. As investments reach subsequent breakpoint thresholds, the sales charge will be further reduced.
Members of the same household (as defined by each mutual fund prospectus) may be permitted to aggregate their holdings with those of other family members to qualify for a breakpoint. Also, breakpoint levels may be reached by combining investments in different funds within the same fund family. Mutual fund prospectuses contain tables that illustrate the available breakpoint discounts and the investment levels. If you own shares in different names or at different firms, you need to tell us if you want those shares to count for breakpoint purposes. Additionally, Rights of Accumulation and Letters of Intent may allow investors to qualify for breakpoint discounts.
Rights of Accumulation
Rights of Accumulation (ROA) discounts apply to mutual fund purchases when new investments are added to the value of prior investments. The combination of these values can be used to reach a breakpoint. For example, a $10,000 investment can be added to an existing $40,000 investment so that when these amounts are combined, a $50,000 breakpoint is reached. Mutual funds may apply ROAs based on the current value of prior investments. For example, a $10,000 investment today combined with a prior investment of $30,000, which now may have a value of $40,000, may qualify for the $50,000 breakpoint. ROAs are not retroactive to the original investment.
Letter of Intent
A Letter of Intent (LOI) is a signed statement that expresses your intent to invest an amount exceeding a given breakpoint within a period of time specified by the fund. For example, if an investor plans to purchase $50,000 worth of Class A shares over a period of 13 months, where each individual purchase on its own would not qualify for a breakpoint discount, the investor could sign a LOI at the time of the first purchase and receive the breakpoint discount associated with $50,000 investments on the first and all subsequent purchases.
If you fail to invest the amount stated in your LOI over the prescribed timeframe, the fund will retroactively collect the higher sales charge.
Understanding How Janney and Your Financial Advisor Are Compensated
Janney and our Financial Advisors receive compensation when clients invest in mutual funds. Depending on share class, compensation may be in the form of a front-end sales charge, a payment or dealer concession from a fund company, or a fee if a mutual fund is purchased in a Janney fee-based account. In addition, mutual fund companies may pay distribution and service-based fees (also known as 12b-1 fees) that vary by share class. Your Janney Financial Advisor receives a portion of this compensation. This compensation is explained in the prospectus, statement of additional information or 12b-1 plan of each mutual fund. You should read this information completely before investing in any mutual fund and discuss the form and amount of compensation he or she receives with your Financial Advisor.
Through our relationship with mutual funds Janney and our Financial Advisors may also receive other forms of compensation that do not directly affect the amounts our clients are charged for mutual fund transactions, including revenue sharing arrangements, promotional assistance and networking reimbursements. These forms of additional compensation are generally referenced but may not be discussed in detail by a mutual fund’s prospectus, statement of additional information or 12b-1 plan. These forms of compensation are meant to cover a variety of initiatives and expenses incurred by Janney, including expenses associated with marketing mutual funds to investors, educating Financial Advisors, and performing administrative services for clients. Since Janney and our Financial Advisors do not receive these forms of additional compensation from every mutual fund family with which we do business, we have a greater financial incentive to promote those fund families that do offer additional compensation. However, our Financial Advisors recommend, and you are free to choose, investments in fund families that do not offer additional compensation.
Revenue Sharing Arrangements
Janney incurs a variety of expenses in connection with educating its Financial Advisors and clients regarding mutual fund investments, and providing marketing and sales support to mutual funds and their affiliated underwriters, distributors and advisors. Mutual fund underwriters, distributors or advisors may enter into revenue sharing arrangements with Janney in connection with the distribution of their mutual funds through our Financial Advisors. Some mutual fund underwriters, distributors or advisors may also enter into revenue sharing arrangements to off-set the costs associated with Janney’s educational and marketing initiatives. In exchange for entering into revenue sharing arrangements, Janney may provide underwriters, distributors or advisors opportunities to (i) participate in Janney’s seminars with Financial Advisors and clients; (ii) distribute information regarding mutual funds to Janney’s Financial Advisors; (iii) review Janney sales data relating to certain Financial Advisors and mutual funds; and (iv) access Financial Advisors in Janney’s branches.
Under a revenue sharing arrangement, a mutual fund underwriter, distributor or advisor will agree to pay Janney a portion of the revenue generated from the sale and management of mutual fund shares in clients’ accounts. When entering into revenue sharing arrangements, Janney requires that the fees be paid directly by the mutual fund underwriter, distributor or advisor, and will not permit them to be made using mutual fund portfolio trading commissions. Where Janney has entered into a sales-based revenue sharing arrangement with a particular fund underwriter, distributor or advisor, Janney typically requests a fee equivalent to .05% of the participating underwriter’s, distributor’s or advisor’s gross sales made through Janney during a given timeframe. Where Janney has entered into an asset-based revenue sharing arrangement with a particular fund underwriter, distributor or advisor, Janney typically requests a fee equivalent to .10% per year of the assets managed by the participating underwriter, distributor or advisor for Janney’s clients. Our Financial Advisors do not directly share in the fees received by Janney pursuant to its revenue sharing agreements.
Janney attempts to impose a standard fee schedule upon all mutual fund underwriters, distributors or advisors whose funds are sold through Janney, and requests a minimum contribution of forty thousand dollars ($40,000). Certain mutual fund underwriters, distributors or advisors, however, may not agree to comply with Janney’s standard fee schedule or minimum contribution amounts. Other mutual fund underwriters, distributors or advisors who distribute shares through Janney may elect not to participate in a revenue sharing arrangement with Janney.
Janney has entered revenue sharing agreements with the following mutual fund underwriters, distributors or advisors, known as our “Product Partners:"
The revenue share payments vary by fund family and are generally based on an annual percentage of the average daily assets invested in a fund ranging from 0.02% (2 basis points (2bps)) to 0.10% (10 bps), as well as an annual percentage of new or gross sales of fund shares generally ranging from 0.05% (5 bps) to 0.10% (10 bps). Additionally, some fund families may make fixed payments in addition to the above payments or instead of those payments. A number of fund families exclude assets in particular share classes (such as institutional and retirement share classes) and/or funds (such as index or money market funds) when calculating the revenue share payments.
The revenue share payments to Janney are from the fund’s investment advisor, principal underwriter or distributor and are in addition to the sales charges, 12b-1 fees and deferred sales charges in the funds’ prospectus fee table. During calendar year 2018, Janney received a total of $2,299,679 in revenue sharing payments from mutual fund underwriters, distributors and advisors. Our Financial Advisors do not share in or otherwise receive any portion of these payments or receive any direct economic benefit from these payments, and they are not required to recommend these funds.
For more information about revenue sharing compensation, please refer to the mutual fund prospectus previously provided.
Janney processes mutual fund trades on an Omnibus basis. This means we consolidate our clients' trades into larger, less frequent daily trade with the fund, enabling Janney to maintain all pertinent individual shareholder information for the fund. Trading in this manner requires that we maintain the transaction history necessary to track and process sales charges, annual service fees, and applicable redemption fees and deferred sales charges for each position, as well as other transaction details required for ongoing position maintenance purposes. We charge those funds with administrative service fees on average $17 per year per client position. Because omnibus trading offers economies, for Janney and the funds, that are greatest when daily trade volumes are high, we have sought to establish omnibus trading arrangements with the fund families that clients trade the most. This may create a conflict of interest in the form of an additional financial incentive and financial benefit to the firm, its financial advisors and equity owners in connection with the sale of fund families trading on an Omnibus Basis.
As of December 31, 2015, we were trading on an omnibus basis with:
ADVISORS INNER CIRC
AKRE CAPITAL MANAGEMENT
COHEN & STEERS
CONESTOGA FAMILY OF FUNDS
CUSHING MLP FUNDS
DODGE & COX
DOUBLELINE FUNDS TRUST
HOTCHKIS & WILEY
INVESTMENT MANAGERS SERIES TR
IVA FIDUCIARY TRUST
LIBERTY STREET HORIZON
MANAGED PORTFOLIO SERIES
MANNING & NAPIER
MMA PRAXIS MUTUAL
NORTHERN LIGHTS FUNDS
PEAR TREE FUNDS
RIDGEWORTH CAPITAL MANAGEMENT
ROBECO BOSTON PRTNRS
STEELPATH MLP FUNDS TR
STERLING CAPITAL FUNDS
TRANSPARENT VALUE TR
TRUST FOR PROFESSIONAL MANAGERS
US GLOBAL INVESTORS
Promotional and Educational Assistance
Janney, our Financial Advisors and our clients may, from time to time, receive from mutual fund underwriters, distributors, advisors or marketing representatives (known as wholesalers) occasional nominal gifts, meals, tickets to sporting events or other comparable entertainment, or payment or reimbursement in connection with conferences or meetings held for the purpose of training or educating clients, prospective clients or Financial Advisors. From time-to-time, our Financial Advisors may also be invited to attend conferences or meetings sponsored by mutual fund underwriters, distributors or advisors. These activities are also intended to result in the promotion of mutual funds.
Trading on a Networked Basis means Janney submits a separate trade for each individual client trade to the fund and therefore we maintain only certain elements of the fund’s shareholder information. To defray the cost of sending confirmations, statements and tax reporting, Janney receives networking reimbursements from certain mutual funds. These charges typically are based upon the number or aggregate value of client positions and the levels of service provided. On a networked basis, the fees range from $3.00 - $10.00 per client account per year, paid quarterly. Our Financial Advisors are not required to recommend these funds, nor do they directly share in any of the reimbursements.
For the year ending December 31, 2015, Janney received networking reimbursement from forty-nine mutual fund companies. Listed alphabetically, these companies are:
AIG SunAmerica Asset Management
Alliance Bernstein Investor Services
Davis Selected Advisers, LP
Delaware Service Company Inc.
Dreyfus Service Corp.
DWS Scudder Inc.
Eaton Vance Funds
Fidelity Corporate Services
Franklin Templeton Investor Services
Goldman Sachs and Co.
Henderson Global Investments
Hotchkis & Wiley
JP Morgan Worldwide Securities Services
Lord Abbett Family of Funds
Nuveen Investments LLC
Oppenheimer Funds • Federated Securities Corp.
Pioneer Investment Management USA Inc.
Security Distributors Inc.
Seligman Data Corp.
Sentinel Administrative Services Inc.
Thornburg Investment Management
Van Kampen Investor Services
Money Market Funds
Janney offers our clients a series of money market mutual funds which are managed by the Dreyfus Corporation. Janney and our Financial Advisors receive payments from Dreyfus in the form of 12b-1 fees and other marketing support payments. For further information, please request a prospectus on any of the Dreyfus money market funds we offer.
Institutional Sales Activities
In addition to payments noted above, Janney receives commissions as compensation for executing trades generated through our institutional sales activities which are not related to the products and services or to the related compensation (as described above) we receive from mutual fund companies.
At Janney, we believe it is important that our clients understand the options and features of mutual funds before investing. It is also important that you understand how Janney and your Financial Advisor are paid. The SEC extensively regulates mutual funds and the broker-dealers that sell them. In addition, the FINRA, a self-regulatory organization, regulates broker-dealers’ sales of mutual funds. There are several informative websites where you can obtain further information about mutual funds including:
Securities and Exchange Commission - www.sec.gov
Financial Industry Regulatory Authority (FINRA) - www.finra.org
Investment Company Institute - www.ici.org
The FINRA site includes a Mutual Fund Expense Analyzer which can be found at
If you have additional questions about mutual funds, please contact your Janney Financial Advisor. As always, we appreciate any comments you may have about this or other disclosure documents we’ve prepared. You can also contact us at:
Janney Montgomery Scott
1717 Arch Street
Philadelphia, PA 19103