Congress didn't actually vote to end the confusion over mutual fund share classes last week, but they took a step that ultimately could go a long way to simplifying the way investors buy and sell fund shares.

The House Financial Services Committee passed the Investor Protection Act of 2009, which has some major provisions concerning the way some financial planners - notably those affiliated with brokers - deal with customers. The offshoot of this bill - if it passes and is taken to its logical conclusion - could end share- class confusion by killing off C-class shares.

Overall, it's a major change in the way funds are bought and sold through advisers.

To see how this could happen in a bill that has nothing directly to do with mutual funds, join me on a roundabout journey that starts with financial planners and brokers, and ends with unintended improvement for fund investors.

The whole thing starts with one of the dirty little secrets in the financial advice world, namely that some people you trust for advice may not have your best interests at heart. Brokers - in fact any type of intermediary whose primary job is selling products - live by the standard of "suitability," meaning that the investments they select and sell to clients must be suitable for the buyer.

By comparison, an investment adviser - anyone who makes their money giving advice, rather than selling products - must live by a "fiduciary standard," meaning they have a responsibility to put your best interests ahead of their own.

Where things have gotten confusing over the years is that there are plenty of people who, technically, are brokers, working for one of the name-brand brokerage houses, but who function as financial planners or advisers. They may act like they are selling advice, but the legal standard that applies to them is suitability.

The result has been years of confusion and arguments in the financial advice business. Brokerage firms felt like it was in their best interests to create a class of counselor who could compete with the emerging horde of financial planners; they just didn't think it was in their best interests to put the customers' interests first.

The Investor Protection Act would change that by requiring that brokers who act like planners - who sell advice, not just products - live up to the fiduciary standard.

It's a major step forward for consumers, and most observers believe the fiduciary standard ultimately will be applied to everyone who sells advice.

Class C shares have no front- or back-end load, but charge a higher expense ratio for life. As a general rule, that means they are the most costly shares for long-term investors. Still, they are popular with advisers and consumers because they feel like no-load funds by avoiding all sales charges.

"This should give rise to the end of the C share, and the whole concept of loads is going away, too. Any loaded funds will become more the exception than the norm," said Geoff Bobroff of Bobroff Consulting in East Greenwich, R.I. "The industry has quietly been moving toward paying all advisers - planners, brokers, whatever you call them - a percentage of assets under management. This will just speed that up."

Chuck Jaffe, senior columnist for MarketWatch, can be reached at jaffe@marketwatch.com

Originally published by By CHUCK JAFFE.

(c) 2009 Boston Herald. Provided by ProQuest LLC. All rights Reserved.

A service of YellowBrix, Inc.