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Front-end fee?


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4 replies to this topic

#1 socjo1976

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Posted 23 March 2007 - 09:36 AM

My knowledege was very limited when fees were brought up during the time I opened my account as I failed to do research. Can someone please help and explain whether a 5.25% front-end sales charge is good or bad? I opened up my ROTH IRA account at Washington-Mutual.

#2 JanetM

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Posted 23 March 2007 - 11:09 AM

Depends on how you look at it. There are front end, back end and no load funds. You got a front end loaded fund. The main difference between these funds are the annual asset management fees you are charged each year. Normally you don't see these fees as the fund skims them off the NAV. Depending on how long you own the fund is what you need to look at. Over time, the front end loaded fund could cost less in fees because the investment management fees over time add up to less than the no load or back end load fund.
JanetM CPA, MBA

#3 John G

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Posted 24 March 2007 - 10:25 AM

I agree with what Janet has said.

But, I think most folks are better served with the NO LOAD version of mutual funds. When you are just getting started, you often don't know how to select a mutual fund. The loaded versions are sold by sales people and you might get pushed into a poor performer. Great for the sales person ~ kaching ~ they get their commision. But, no so good for you if you decide to switch funds after a year or two. I suspect that the person who steered you toward Washington Mutual didn't mention the term "no load".

Can a loaded (back or front) fund perform well? Sure. Can a no load perform poorly? Yep.

Loads are only one factor effecting your net performance. All funds have annual expenses which drain away performance. Vanguard index funds and Fidelity Spartan funds in some cases have annual expenses less than 0.2 %. [The annual expenses of a few ETFs are even a slice lower.] The average annual expense of an actively managed fund is about 1.5%, but some exotic funds (sector, international come to mind) may have annual expenses much higher. In theory, expenses and loads are like running a 10K with lead weights around you neck and waste. They slow down performance.

The third major component that effects your annual net appreciation is the underlying stock choices and asset allocation mix deployed by the fund. In theory, an actively managed fund with an outstanding manager will perform above average. But, index funds (a fund essentially run by a computer off a list of stocks like the S&P500) beat a lot of actively managed funds because of ultra low annual expenses. Index funds annual expenses are often more than 1% lower than the average actively managed fund.

Annual fees are generally not a huge factor in your net, but they may look that way the first few years. Some custodians (like full service brokers) might charge an absurd $60, while some internet based discount houses will waive annual fees if you elect to do monthly contributions or use email for statements.

Here's my question to you: "Are you in a mutual fund at Washingon Mutual the bank (in which case which mutual fund) or are you in a fund with the name Washington Mutual?" Please post again.

#4 socjo1976

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Posted 27 March 2007 - 08:24 PM

I agree with what Janet has said.

But, I think most folks are better served with the NO LOAD version of mutual funds. When you are just getting started, you often don't know how to select a mutual fund. The loaded versions are sold by sales people and you might get pushed into a poor performer. Great for the sales person ~ kaching ~ they get their commision. But, no so good for you if you decide to switch funds after a year or two. I suspect that the person who steered you toward Washington Mutual didn't mention the term "no load".

Can a loaded (back or front) fund perform well? Sure. Can a no load perform poorly? Yep.

Loads are only one factor effecting your net performance. All funds have annual expenses which drain away performance. Vanguard index funds and Fidelity Spartan funds in some cases have annual expenses less than 0.2 %. [The annual expenses of a few ETFs are even a slice lower.] The average annual expense of an actively managed fund is about 1.5%, but some exotic funds (sector, international come to mind) may have annual expenses much higher. In theory, expenses and loads are like running a 10K with lead weights around you neck and waste. They slow down performance.

The third major component that effects your annual net appreciation is the underlying stock choices and asset allocation mix deployed by the fund. In theory, an actively managed fund with an outstanding manager will perform above average. But, index funds (a fund essentially run by a computer off a list of stocks like the S&P500) beat a lot of actively managed funds because of ultra low annual expenses. Index funds annual expenses are often more than 1% lower than the average actively managed fund.

Annual fees are generally not a huge factor in your net, but they may look that way the first few years. Some custodians (like full service brokers) might charge an absurd $60, while some internet based discount houses will waive annual fees if you elect to do monthly contributions or use email for statements.

Here's my question to you: "Are you in a mutual fund at Washingon Mutual the bank (in which case which mutual fund) or are you in a fund with the name Washington Mutual?" Please post again.



I'm in an aggressive growth portfolio called Putnam Asset Allocation at Washington Mutual.

#5 John G

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Posted 28 March 2007 - 03:02 AM

Putnam Asset Allocation - aka PABAX

This is a hohum actively managed mutual fund. There is a 5.25% front end load, and each year they take 1% for expenses. The fund is supposed to be a blend of growth and value styles, mostly large cap (capitalization) firms. But recently, the fund has been 10% in cash and 21% in bonds. The cash and bond components will moderate returns compared to a more heavily loaded stock fund, which means you will over the long haul average a lower return than just stocks. The top holdings are FNMA, Exxon, Citi, Phillip Morris (Altria), IBM, Microsoft, Cisco.... and strangely a iShares Russell 1000 growth ETF (which seems outside of their stated investment objectives). The long term average annual return has been in the 6.35 to 6.94 for 10 and 5 years - which is not exactly stellar results.

Conclusion: your advisor probably got a nice commission with this pick, but what did you get? It looks to me like you got stuck in a mediocre fund. Frankly you could have done better by picking ANY general market no load index fund because you would not have given up the 5.25% on the front end, and your annual expenses would be closer to 0.2% (1/5 the expenses of this fund). If you had made any noload choice, you could change to another no load fund without penalty.

Who told you this was an aggressive growth fund? Microsoft and Cisco have not been really growth stocks for the past 8 years. Mostly this fund holds stocks in very large companies and the bonds are all nice AAA types. Maybe you should ask your advisor what they mean by the term aggressive... I don't see anything "aggressive" about this fund?

You can do basic fund research by visiting your local library and reading Morningstar reports, reading free summaries of funds in Yahoo finance website, on the website of the company that created the mutual fund, or in the online resources that almost all brokerages offer.... and then there is Google searching which will often pick up articles where the fund is mentioned. And, there is always the actual prospectus that you should have received.

Here is what anyone who is researching a fund should look for:

1. Commission type vs no load
2. Fund investment objective
3. Fund focus (market cap, style, niche, etc.)
4. Allocation of current assets (cash drag, bond component)
5. Who is the manager and how long has he run this fund?
6. How has this fund performed over many years, good times and bad? What benchmarks are used for comparison?
7. Annual operating expenses
8. Top holdings
9. Morningstar rating (a crude indicator only)
10. Percent of holdings in non-US markets
11. Turnover of portfolio (high turnover can trigger capital gains in non IRA accounts)
12. Style drift (does the fund shift around or stay true to the state investment objectives)