Practical Applications of Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice?

Practical Applications Summary

In Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice? in the Spring 2020 edition of The Journal of Index Investing, Jonathan Handy of Western Kentucky University, Jonathan Ricketts of Furman University, and Thomas Smythe of Florida Gulf Coast University review the empirical and academic literature on multiclass mutual funds and draw conclusions about the suitability of such funds for investors. The authors trace the history of these investment products and examine the considerable body of evidence that multiclass funds have governance issues and incur substantial, if not excessive, expenses.

Although the multiclass framework may broaden investor options, it also inherently leads to agency problems. Fund advisors often face conflicts of interest between themselves and their clients. They may be motivated to recommend a class of mutual fund shares that is inappropriate for a client but may be the most profitable for the advisor to sell. Moreover, investors are confused by the categorization schemes of multiclass funds and their associated fees. Advisors and fund managers themselves are often not fully conversant with the characteristics of the multiclass funds they are touting. The systemic weaknesses of the multiclass-fund framework should prompt reconsideration or even eschewal of these products by investors and advisors alike.