Load Versus No Load

[Guest wobber]

I have read this board in depth, and the reoccurring theme seems to be to take out a Roth account with a "no load." From what I understand, a no load would only carry an annual service fee, with no front, or back end fees incurred. Although this seems to make the most sense from a savings standpoint, I have to wonder if a load account would, or could, hurt that much more in the long run. I have a broker/friend who would like to sign me up with a choice of one of many well known mutual fund providers. The names of these companies are well known and highly regarded in the investment world. The problem lies in my not really knowing how much of a commission this broker, and/or the mutual fund company well be taking from me. He tells me that there are no annual service fee's, and the commission the company takes is a small fraction of 1% of the interest that I might make off the investment. This seems very tolerable, but I do wonder what the salesperson himself will be making from my investment for the next 20 + years, if I keep it with him? I realize that everyone has to make a living, and I do not wish to be unreasonable about all this, but I would hate to think that up to 5% of my returns per year might be going into someone else's pocket! If this be the case, these extra percentages would be better off multiplying in my own fund, to be better served in my own pocket in later years! Would a no load account in this case not be better? How do I find out this commission information without being downright blunt about it? Or is this information hidden from me before and after I invest? I would like to invest with this person, but not at my own personal long term expense.

[John G]

NO LOAD - refers to a group of mutual funds that are defined as not having any front end or back end commissions charged. The other two catagories are "LOW LOAD" (funds with a smaller percent fee such as 3%) and "LOADED" (funds that take between 6 and 8% out either initially or when you remove funds.

You need to understand that "LOADS" are one of three major catagories of expenses that can be charged with mutual funds. The other two are "annual expenses" (often refered as 12b expenses) and "annual fees" (what the custodian may charge each year to maintain the account, varies from zero to perhaps $80). Annual fees vary from as low as 0.17% per year for some INDEX funds to about 3.00% for some special purpose funds that have a narrow focus like a specific economic sector or international location. Since there are over 10,000 funds... all these comments are generalizations and there are exceptions to each of my statements.

All mutual funds incur various expenses to operate such as printing, accounting, postage, advertising, etc. "LOADED" funds usually are designed to be sold by commissioned agents who get a substantial part of the front end commission. "NO LOAD" funds are usually sold via the internet, mail or 800 numbers, something akin to GEICO insurance.

I know of no funds that charge anywhere near 5% each year. It is even rare to get up near 3% as that is such a huge hurtle to overcome.

Having a "well known name" is no indication that any fund is a good choice. There are lots of well known funds that have been long term stinkers. I recommend that you reach the March issue of Consumer Reports to find a good list of funds that have performed well in many economic environments.

It has been my experience that mutual fund sales agents rarely have an indepth understanding of the products they sell. There is a lot of turnover in this industry and you can't make a living if you can't generate commissions. Be cautious about your source of information. You have the primary role in determining if your investments are appropriate. A good place to start is to read Kiplinger Finance, Worth, Money or CR and build up your basic understanding of mutual funds. Next stop is the local library to get a general book on investing. One you have a couple of potential funds to consider (such as using the CR listings), the next step is to request a prospectus and READ about the investment objectives, fees, expenses, and fund mgmt.

A word of caution: often the hotest funds in one year become the dogs in the following year. This is especially true of narrowly based funds such as those that might focus on one country, one industry or one type of company. Chasing the top performing fund of the last couple of years is ussually a very bad strategy.

Finally, you should also understand about INDEX funds. These take a mathematical approach to investing, working off a list defined by someone.... such as 500 largest companies, all companies on the NYSE, the 5000 most actively traded firms, etc. The huge advantage of index funds is that they have extremely low annual expenses, because they are computer driven and have a minimal staff (no junkets to visit firms for example). Low expenses means that you get almost all of the benefit of the annual performance. INDEX funds work on the premise that finding an inexpensive way to own a diverse portfolio is more important than stock picking.

If your broker friend does not want to talk with you about various types of mutual funds and in particular INDEX funds, then you should be very suspicious about the quality of the advice. You find out about commissions and fees by asking for a prospectus. Of course, your broker should answer this direct question in non-ambigous language. If you sense you are getting the run around or that your question is derided or the answer is obscure - - stop doing business with this person. Ethical brokers will clearly explain the fees involved and will try to make a case that their advice is worth those fees. Sometimes it is. I believe that most individuals will benefit from building up their knowledge and making less expensive investment choices. It takes some time, you will make some mistakes, but, you will have a better understanding of your investments.

You asked some very good and big questions. Post again if you have more Qs or I did not cover everything you need.