· You can't make money without ending up paying taxes. Trying to minimize taxes will only result in not making profitable investments, so you'll end up with sub-par returns. Over time this could result in half of the retirement income you could have had.

The amount of money you make in profits is around three times the amount of taxes paid, so it makes no sense to not profit because you hate taxes.

· If mutual fund tax-efficiency was important, then investment database firms would track it. Most investors find it unimportant, so it's hard to find investment software that has this capability in its screening function.

· Rarely have any tax-efficient / socially responsible / extremely low management fees / or low turnover ratio funds passed our screens.

Things like this are in the press because there's little else to write about these days.

So if you care about these things, then you'd buy them only if you really really hated paying taxes, really really cared about saving humanity, you just have to have a mutual fund with extremely low management fees, or you don't think fund managers should be trading with your money so much.

You can have pride that you've accomplished these goals, but you'll most always be making less profits and income compared to not having these constraints.

· All investments with capital gains will have to be sold eventually, as no company can dominate their market and create above-industry returns forever. So if a mutual fund has high tax-efficiency/low turnover for a long time, it's only a matter of time before things change, and this bulk of profits has to be taken.

Then you're going to get a huge tax bill when you least expected it. In other words, a very tax-efficient fund today could be a very tax-inefficient fund tomorrow, and vice versa. Then the fund may close because it failed to meet its objective.

The only way around this problem is for the fund to hold securities that are going to get sub-par returns in the future (stocks that don't go up a lot, or managers that fail in their duty to buy low and sell high). This is what tax-efficient funds do, which is why their returns are sub-par.

What Mutual Fund Share Class Letters Mean

The actual manager, underlying investments held, management fee, and performance are usually the same regardless of the share class. Share classes are only for distinguishing differences between the ways fees and commissions are paid to advisors for selling the same underlying mutual fund.

Some share classes are only for variable annuity subaccounts, and some are only used in institutional accounts. Individual investors won't be able to buy these through a discount broker.

Morningstar has about 25,500 mutual funds in their database. If you eliminate all of the share class duplicates, there are only about 7,000.

The A-Share Class of Mutual Funds

This is the type of mutual fund where you pay a front-end load / sales charge / commission every time you contribute money to the fund.

It's common for a mutual fund to not allow any way of getting around paying the front-end load, other than going through a fee-based investment advisor.

Compared to B- and C-shares, A-shares have a bad rap because the initial commission is the most obvious and painful. It also stands out like a target to give the press something to write about. But as you can see when you crunch the numbers with this investment software, they have better long-term results than B- or C-shares.

That's because you're paying commissions on the smallest amounts of money possible - the initial contributions. The big money disappears from your fund in future years when the account grows, and the higher annual B- or C-share 12b-1 fees are applied as a percentage of the total account balance. This eats away at your money more and more every year. So paying an initial A-share sales charge is going to make more money than getting more and more sucked away every year in the higher 12b-1 fees of the B- or C-share classes.

The bottom line is if you're going to compensate a commission-based advisor, you want to do it with the smallest amount and get it over with ASAP (we think the best way to go is to hire a fee-only advisor that doesn't work on commissions, but that's another story).

So when a financial advisor asks you which method of buying mutual funds you want to use, choose A-shares over B- or C-shares. They'll never object to that. Now that you know the difference, just tell them you'd rather buy the kind of mutual funds that have an initial commission if they start talking about redemption fees.

Compare the long-term results of different share classes in minutes by looking at the investment comparator demo.

The B-share Class of Mutual Funds

This is where there is no up-front sales commission (load) on contributions to the mutual fund, but the fund family will deduct this percentage from withdrawals. These are also called redemption fees, Deferred/CSDC charges, or back-end loads. They usually decline annually, and eventually go away altogether.

Investors easily fall for B-shares in sales situations because they don't understand short-term vs. long-term differences. They think they're beating the system by avoiding the initial pain of paying the A-share front-end load because they won't be selling while the redemption fees are in force.

The system can't be beat like this. Advisors make the same amount of up-front commission with B-shares as they do with A-shares, which explains why they're so motivated to sell them.

B-shares usually charge a higher 12b-1 fee than A-shares to generate this up-front commission over time. This money has to come from somewhere, and so if you don't sell shares while redemption fees are in place, then there is nowhere to get the money to pay the salesperson. So they get it along the way by charging you higher annual 12b-1 fees.

They are either getting the money to pay the advisor's commission through the higher 12b-1 fee if you don't redeem, or through the higher 12b-1 and the redemption fee if you do redeem. So you can't win either way with B-shares. This is why there's stricter regulations and more scrutiny on salespeople that sell them.

After the redemption fees go away, salespeople will want you to sell that fund and buy another, or buy different classes of shares, or totally different types of products (annuities) so they can get paid again. They’re supposed to have you sign a form acknowledging that you’re paying again, but slick salespeople can usually gloss this over and get you to sign fairly easily. The form is to alert compliance people, but rarely does something happen other than a phone call (maybe saying not to it again to repeat offenders), especially if the salesperson is a big producer. Doing this without a good reason stated on the form is a violation of FINRA rules. Note that, “so the salesperson can get paid again at your expense ASAP” is not a good reason, and it’s what FINRA is looking for (so they can “arrest and charge” the salesperson, and then conduct an investigation, etc.). But since compliance people rarely tell FINRA about their rouge salespeople, they rarely find out, and nothing happens (other than you paid again and the system made more money).

Here are three examples of why it's best to pay a load when you buy compared to when you sell: Say you invest $10,000 into an A-share fund at 5% load. You pay $500 up-front in commission. It goes up at a 10% gross total rate of return. Then an emergency happens one year later and you need to sell it all. You'd get around $10,331 assuming a 1% management fee and a 0.25% 12-b1 fees.

If you bought the B-share version, then you would avoid paying the initial $500. But when you sold, you'd only get $10,260 back, assuming a 1% management fee, 1% 12-b1 fee, and a 5% back-end load. This $71 is only a 0.7% difference in the first year, but it grows over time.

The calculations using the same assumptions over a five-year period, assuming the back-end load reduced to 3%; would net $14,450 for the A-share fund, and $14,252 for the B-share fund. This is a difference of $198, or 1.4%.

The calculations using the same assumptions over a ten-year period would net $21,979 for the A-share fund, and $21,589 for the B-share fund. This is after the redemption fees totally went away. This difference of $590, or 1.8%, was only due to the 0.75% difference in annual 12-b1 fees.

So as you can see, the difference grows annually (0.7% in one year, 1.4% in five years, and 1.8% in ten years). Plus the higher the growth rate, the higher the 12b-1 fees, and the more the difference grows.

No matter how you look at it, you'll almost never do better in B-shares compared to A-shares.

The C-share Class of Mutual Funds

This is where the mutual fund does not charge a front- nor back-end load, but charges up to several times more in annual 12b-1 fees than on A-shares (and sometimes more than B-shares).

This money goes to the investment advisor as an "annual investment management fee." This allows commission-based salespeople to charge clients an annual fee, and have it treated as commissions, so they won't have to spend the resources to be able to charge actual investment advisor fees, like an RIA.

Working on a fee basis is generally fairer for both the client and advisor than getting paid via commissions. As long as everyone is okay with the advisor making money like this, there really isn't anything wrong with it.

But it's a common abuse when it's not disclosed, advisers charge additional investment advisory fees on top of C-share fees, and they steer clients only toward C-shares instead of using the most suitable funds.

When this abuse occurs, it's usually found that the advisor perpetrated all three abuses at the same time. When we've seen advisors doing this, the clients had no idea and were shocked when they realized the total amount of annual fees were over 3% (1% 12b-1, 1.5% advisor management fee, and over 0.5% in "other fees"). Advisors do this because these different types of fees are all shown on different statements, if at all, so clients' are usually too busy or ignorant to catch on. So it's an easy way to both maximize income, and minimize the risk of getting caught (and into trouble).

Any investor experiencing this (total fees over 3%) should immediately fire their advisor by writing a hard copy letter requesting their account be closed to the salesperson's branch manager. Then demand 1% of your money back for every year it happened.

Anything over 2% is considered to be abusive, especially if there is no hard copy disclosure letter with the client's signature saying they understood and approved. If the total is between 2% and 3%, then just call the branch manager and complain.

So it's important to add up all fees that the mutual fund, advisor, Broker Dealer, custodian, and everyone else charges, and then decide if you think you're getting your money's worth. Like you've heard before, obtain and read the Fees and Expenses section of the prospectus on every mutual fund, and all of the other paperwork your advisor gave you, before you invest.

If all fees on everything related to your advisor adds up to over 1.5%, then you're probably being overcharged. If you're being charged a lot, and not consistently and substantially beating the markets, then you'd probably be better off finding a true fee-only advisor or managing your own money.

"LW" stands for Load Waived, which means one buys the A-share class without paying the initial sales charge. So it's similar to buying A-shares in a fee-based account.

In most cases, these are not available to individual investors. Most small-time advisors can't even get LW shares at NAV. This is relatively new, so it will take time for things to be worked out. As more deals are negotiated with more custodians, more fee-based and fee-only advisors will be able to buy them for their clients.

Miscellaneous

Some mutual fund families change these share class letters around to try to trick you into thinking they're not dinging you fees and commissions. The vast majority of mutual funds are one of these four types, even though they may call them Z-shares. All you need to do is evaluate the front-end load, back-end load, and the size of the 12b-1 fee to see which share class it really is.

If an investor hires an advisor for investment advice, then they deserve to be paid somehow. So you'll end up paying in one way or another. This is all fine, as long as the investor understands how their money gets shaved off of their investments, and where it's going.

The only way to not pay anyone anything, other than the mutual fund management fee (which can't be avoided and goes to pay the mutual fund and its investment managers), is to learn how to manage your own money.

The investment software here compares the long-term results, and impact of various types of mutual fund loads and fees, in 22 different methods of investing.