One of the minor problems with working in an industry like investment management is that when you do it long enough, it becomes easy to assume that information that has been basic and common to you for so long has now become so for everyone else. On that note, we received a letter the other day from someone who had invested in load, or commission-based, mutual funds, and wanted to know more about the difference between those and the no-load option, as well as why the no-load will always be the better choice. Once again, we were reminded that important information about this subject is not something about which everyone is aware, and so we want to take this opportunity to talk about it.
In mutual fund parlance, a load is a commission, which means that a load fund is one that charges a fee…often around 5%...just for the privilege of buying it, while a no-load fund charges no such commission. Most investment professionals who dislike load funds do so because they represent an exception to the general rule that paying more for something means you’re getting a better product or greater value somehow; paying the load on a mutual fund doesn’t get the investor anything additional of value. A load is simply a commission on top of the normal fund expenses, which are still assessed even though you are also paying a sales commission. No-load funds charge the same annual expenses, which are used to defray the costs of fund management, administration, and other related expenses that are regarded as being necessary to the normal operation of the investment collective, but they
do not also assess a sales charge.
Something else to note: Not only does paying the load add nothing of value to your investment in the fund, it actually subtracts value because a portion of your purchase amount went to paying a broker, and not into buying shares of the fund; when you buy a no-load fund, all of your investment is used to buy fund shares.
So, why do load funds even exist, anyway? The truth is that they are basically relics from a time when all financial products were bought with commissions, to compensate brokers and agents on the basis that after you bought the product and needed customer service assistance after the sale, the broker or agent would have been compensated for his time by having collected the commission you paid. Nowadays, as access to information has evolved and the ability for average investors to make their own decisions has vastly improved, there’s not the same need for service on a mutual fund portfolio from a broker as there perhaps was at one time. No-load funds have their own customer service teams, as well, and while they cannot dispense advice, they can generally handle all of the requests that most people today need from a mutual fund after a sale (redemption requests, information on performance, questions about statements, etc.)
It bears mentioning, too, that every so often, a proponent of load funds will point to some selectively targeted data that will show a load fund outperforming a similar no-load in some form or fashion. Don’t be swayed; the universe of mutual funds is so large nowadays that any load fund with return X will have a no-load counterpart with a return that’s similar or better.
Given all of this, will no-loads ever completely take over the investment world and make load funds a permanent part of investing history? It’s hard to say, for sure, but it wouldn’t be surprising to see that one day become the eventuality. The point is that right now…today…there’s no reason for you or anyone else to spend one more dime on a load fund. If you are in the market for no-load mutual funds, take advantage of the great fund screeners that are available free of charge at places like Morningstar (www.morningstar.com) to find the mutual funds that best serve your goals and objectives.
James L. Paris and Robert G. Yetman, Jr.
Christian Financial Planner
None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever. It should be noted that, at any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column. Furthermore, it is strongly suggested that you seek the advice of an appropriate financial professional before making any changes or implementing any decisions with regard to your personal financial profile.
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