Mutual Fund Abuses:
The ways in which brokers defraud their customers through
the sale of mutual fund shares are numerous. Brokers will sometimes switch
customers from one fund to another, at great cost to the customer, for the
sole purpose of earning commissions. The desire for high commissions
also causes brokers to sell what are known as Class B mutual fund shares
to customers who would have otherwise qualified for the price breaks available
from Class A shares. Class B funds are the highest cost funds in terms of annual expense
cost and 12b-1 costs, which are additional commissions brokers earn year after year.
Class B funds also feature stiff contingent deferred sales charges of up to 5% or more if
the shares are sold typically less than five years from the purchase date.
Many large brokerage firms also encourage their brokers to sell in house or proprietary
mutual funds where the payouts to the brokers are higher than outside mutual funds
and where the firm makes much higher profits. These mutual funds are not always in the customer’s
best interests. Brokers who engage in these and other violations involving mutual funds
are liable for losses suffered by customers.
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