The most popular variable annuity contract is the “B” share annuity contract. This contract has an average M&E (mortality and expense plus administration fees) of 1.35%. That is what is called the base charge of the contract. There are additional costs for sub-account expenses and additional rider costs. The total fee for a “B” share variable annuity is about 2.7% a year.
The M&E expense (mortality and expense plus administration fees) generally covers the commission paid to the adviser and other general expenses from administering the variable annuity contract. In general the B share annuity has a seven year surrender schedule and other standard features. The typical commission on a “B” share variable annuity contract is 6.5% all upfront with little or no trailing commissions to the adviser.
Because the annuity industry recognized that they could attract more producers/financial advisors to sell their product by offering a product that had a decent upfront commission and paid out a generous trailing commission they developed a hybrid variable annuity contract called the “L” share. This L share variable annuity contract has a shortened surrender schedule, usually 3 to 5 years, and has a significantly higher M&E (mortality and expense plus administration fees) cost averaging 1.65% a year. Generally an L share variable annuity pays the adviser a 3-5% upfront commission with a .75-1% trailing commission paid out in either the 13th month or after the surrender schedule expires. This is why the M&E cost is much higher with an L share versus a B share variable annuity contract.

Many financial advisors prefer the L share variable annuity option and recommend it to their client because it has a higher trailing commission (which acts as a virtual annuity of income for the financial advisor because of the trail commission). This is reflected in the variable annuity sales data which shows the L share annuity contracts have quickly become as popular with financial advisors as the B share contract.

While an L share variable annuity contract is great for the financial adviser, it is not good for most annuity buyers. If the annuity buyer is seeking a short-term investment within a variable annuity contract than this option is OK, but since variable annuities, or any equity investment, is considered a long-term investment it makes little sense for the annuity buyer.

Since this market is an adviser driven market many consumers do not understand that they may receive a better deal if they look at the B share variable annuity contract instead of the L share.

If you have questions about a variable annuity investment you made, or if you believe that you have been the victim of a securities fraud, the Law Offices of David A. Carter, P.A. may be able to help. The Law Offices of David A. Carter, P.A. is a South Florida securities fraud, securities arbitration, investor protection, and Chapter 7 bankruptcy law firm based in Boca Raton. David Carter is a securities attorney that reviews securities fraud cases throughout the country and Florida, including securities fraud cases in Vero Beach, Melbourne, Daytona Beach, Okeechobee, Gainesville, Orlando, and Ocala. To contact the Law Offices of David A. Carter, P.A., please call 561-750-6999, or email us at contact@carterpa.com. For more information about the Law Offices of David A. Carter, P.A., you can also visit our website at www.carterpa.com.

The following is a brief summary on the different types of mutual fund classes.
What Are Mutual Fund Classes?

Typically mutual fund offer more than one “class” of its shares to investors. Each class represents a similar interest in the mutual fund’s portfolio but the principal difference between the classes is that the mutual fund will charge the investor different fees and expenses depending on the class you choose.
What Types of Fees and Expenses Will I Pay?

If You Buy Class A Shares:
Class A shares typically charge a front-end sales charge. When you buy Class A shares with a front-end sales charge, a portion of your dollars is not invested. Class A shares may impose an asset-based sales charge (often 0.25 percent per year), but it generally is lower than the charge imposed by the other classes (often 1.00 percent per year for B and C shares).

A mutual fund may also offer you discounts, called breakpoints discounts, on the front-end sales charge if you:

• make a large purchase;
• already hold other mutual funds offered by the same fund family; or
• commit to regularly purchasing the mutual fund’s shares.

If You Buy Class B Shares:
Class B shares typically do not charge a front-end sales charge, but they do impose asset-based sales charges that may be higher than those that you would pay if you purchased Class A shares. Class B shares also normally impose a contingent deferred sales charge (CDSC), which you pay if you sell your shares within a certain period, often six years. For this reason, these shares should not be referred to as “no-load” shares. The CDSC normally declines the longer your hold your shares and, eventually, is eliminated. Within two years after the CDSC is eliminated, Class B shares often “convert” into lower-cost Class A shares. When they convert, they begin to charge the same fees as Class A shares.

Class B shares do not impose a sales charge at the time of purchase. So unlike Class A purchases, all of your dollars are immediately invested. But your annual expenses, as measured by the expense ratio, may be higher. You also may pay a sales charge when you sell your Class B shares.

If you intend to purchase a large amount of Class B shares (over $50,000 or $100,000, for example), you may want to discuss with your financial adviser whether Class A shares would be preferable. The expense ratio charged on Class A shares is generally lower than for Class B or C shares. The mutual fund also may offer large-purchase breakpoint discounts from the front-end sales charge for Class A shares. If you do not plan on holding the investment long term, B shares may not be appropriate for you. If your financial advisor is recommending a B share mutual fund as opposed to an A share, this may be because the commission to the financial advisor for selling a B share mutual fund is greater than if he/she sold you an A share.

If You Buy Class C Shares:
Class C shares do not impose a front-end sales charge on the purchase, so the full dollar amount that you pay is invested. Often Class C shares impose a small charge (often 1.00 percent) if you sell your shares within a short time, usually one year. They typically impose higher asset-based sales charges than Class A shares and, since they generally do not convert into Class A shares, those fees will not be reduced over time.

Additionally, in most cases, your total cost would be higher than with Class A shares, and even Class B shares, if you hold for a long time.
If you have questions about a mutual fund you purchased, or if you believe that you have been the victim of a securities fraud, the Law Offices of David A. Carter, P.A. can help. The Law Offices of David A. Carter, P.A. is a South Florida securities fraud, securities arbitration, investor protection, and Chapter 7 bankruptcy law firm based in Boca Raton. David Carter is a securities attorney that reviews securities fraud cases throughout the country and Florida, including reviewing securities fraud cases in Tampa, Orlando, Miami, West Palm Beach, Delray Beach, Fort Lauderdale and Vero Beach. To contact the Law Offices of David A. Carter, P.A., please call 561-750-6999, or email us at contact@carterpa.com.