Are there any Pros to Load Funds?

Archived From: Finance
  • Page :
  • 1
  • Text Only
Voting History
rated:
I'm a newb here, reading about all these no-load funds and willing to invest in the upcoming year or so. Wondering, why are load funds out there? Do people actually invest in load funds? Are there are pros? 

Why would anyone invest in one when there are no-load funds available to the general public? Are the load funds basically gimicks for large banks (Chase, BofA) to trap their naive customers?

We all know load funds dont gaurantee higher returns than no-loads, so maybe i'm missing something that is actually good about load funds?

Member Summary

If you believe in active management, then some of them may have higher returns after fees. They have not outperformed their peers in aggregate though.

Load funds exist to pay higher fees to their creators and intermediaries, IMO.

If you plan to hold a fund for a long time, a back-end-load is a good thing since it reduces the externalities associated with people selling their shares in a fund.

The Pro would be that there are certain funds that have actually outperformed other no-load funds over periods of time even taking the load and expenses in consideration. You would need to be a believer that an active management approach will give you much higher net returns in the long run. Short-term, the load immediately puts you in the red, because your gain must need to exceed the sales load to even break even. In the past some load funds have delivered very good returns even after the sales load and various expenses. The trick is to know which fund will do that and keep on doing that after all expenses have been taken into consideration. Good Luck with that.

There are typically two areas where load funds have higher fees than the minimalist index fund. They should be debated separately.

1) Actively managed fund fees / fees to the fund money manager.

Whether this fee is worth it or not is whether one believes active management is better than passive (index) investing. This is a personal opinion and choice.


2) Load fees and/or 12b1 fees that goes to the financial advisor (sales and servicing person).

Whether is worth it or not comes down to what level of service and expertise you get from the advisor, time saved for you, versus the amount of the load/fees. Also a personal choice since 1 hour of your time may not be worth the same as 1 hour of my time.

Generally many get a raw deal because they do not need expertise (simple investment circumstances), advisor isn't that knowledgeable, advisor doesn't do much beyond the minimum to close a sale.

A load fund is likely to make more sense IF one gets significant attention, time, expertise from the advisor over several years EVEN without adding new money AND you value the service highly.

Load funds typically have a small trailer like 25bps in addition to a large transaction driven commission. 25bps on $100k is only $250. If you get several hours of servicing a year but dont add new money, $250 is a cheap price for ongoing servicing.

This is all a big IF however. One has to find an advisor more concerned with relationship management than quick sales.

Buy index funds.

/thread

Paging MikeF07

Loading your adviser or brokers pockets with referral fees?

gaffer said:   The Pro would be that there are certain funds that have actually outperformed other no-load funds over periods of time even taking the load and expenses in consideration. You would need to be a believer that an active management approach will give you much higher net returns in the long run. Short-term, the load immediately puts you in the red, because your gain must need to exceed the sales load to even break even. In the past some load funds have delivered very good returns even after the sales load and various expenses. The trick is to know which fund will do that and keep on doing that after all expenses have been taken into consideration. Good Luck with that.
  
TravelerMSY said:   If you believe in active management, then some of them may have higher returns after fees. They have not outperformed their peers in aggregate though.

Load funds exist to pay higher fees to their creators and intermediaries, IMO.

  

This and this.  Well said right there.

There is a lot of misunderstanding on this subject(Jahlapenoez provided the only accurate informational post for you here).

So the first thing to understand is exactly what Jahlapoenoez said which is where is the money going to. Is it going to the advisor/broker as 12b-1 or is it going to a portfolio manager for managing assets. These days 95% of the time load charges plus a piece of the annual expense charges go to an advisor/broker. It's just a form of compensation except built into a fund instead of paying the advisor a separate fee.

That brings us to the first(and potentially only reason) why you would ever buy a loaded mutual fund and that is to pay an advisor for services rendered. So it really comes down to whether said advisor is really delivering any value to you. Is he just picking a couple of funds and blowing you off or is he developing a financial plan, consulting on a bunch of big financial decisions, doing some tax planning, etc. and this is how you're compensating him for all of that. Now I tend to believe that it's just superior to pay the guy separately for all of that vs. having it built into the mutual fund(and then paid as a commission), but there isn't a whole lot of difference to what he gets(actually it's probably worse for him to sell loaded for his revenue--although there are other things at play here as well unrelated to the advisor that probably aren't in your interests to have 'built in payment').

The other thing to be aware of is that when you pay an advisor maybe 1% a year vs. indirectly a 4% load commission + a 12b-1 trail of maybe .25% or whatever you tend to get treated differently. If you're a small fry you might not even hit an advisors minimum for 1% and can't even become a client. The commission focused advisor might spend a lot of time with you for the first year when they collect their commission only to neglect you because of how small the trail is. So you'll definitely see behavioral changes there.


A load charge is supposed to also be a substitute for a higher annual expense charge, but that really is only somewhat true in practice(if we assume 2 like actively managed funds).



Otherwise if you have no need or use for an advisor I can't really see why anyone would ever pay a load charge. Even if you did have an advisor I have no idea why they wouldn't just offer you wholesale funds and charge their fee separately. Otherwise load charges are just a holdover for a pre-internet era where you really couldn't get any security product without paying a commission to someone who could sell it(whether you wre talking an individual stock or a mutual fund).

dshibb said:   There is a lot of misunderstanding on this subject(Jahlapenoez provided the only accurate informational post for you here).

So the first thing to understand is exactly what Jahlapoenoez said which is where is the money going to. Is it going to the advisor/broker as 12b-1 or is it going to a portfolio manager for managing assets. These days 95% of the time load charges plus a piece of the annual expense charges go to an advisor/broker. It's just a form of compensation except built into a fund instead of paying the advisor a separate fee.

That brings us to the first(and potentially only reason) why you would ever buy a loaded mutual fund and that is to pay an advisor for services rendered. So it really comes down to whether said advisor is really delivering any value to you. Is he just picking a couple of funds and blowing you off or is he developing a financial plan, consulting on a bunch of big financial decisions, doing some tax planning, etc. and this is how you're compensating him for all of that. Now I tend to believe that it's just superior to pay the guy separately for all of that vs. having it built into the mutual fund(and then paid as a commission), but there isn't a whole lot of difference to what he gets(actually it's probably worse for him to sell loaded for his revenue--although there are other things at play here as well unrelated to the advisor that probably aren't in your interests to have 'built in payment').

The other thing to be aware of is that when you pay an advisor maybe 1% a year vs. indirectly a 4% load commission + a 12b-1 trail of maybe .25% or whatever you tend to get treated differently. If you're a small fry you might not even hit an advisors minimum for 1% and can't even become a client. The commission focused advisor might spend a lot of time with you for the first year when they collect their commission only to neglect you because of how small the trail is. So you'll definitely see behavioral changes there.


A load charge is supposed to also be a substitute for a higher annual expense charge, but that really is only somewhat true in practice(if we assume 2 like actively managed funds).



Otherwise if you have no need or use for an advisor I can't really see why anyone would ever pay a load charge. Even if you did have an advisor I have no idea why they wouldn't just offer you wholesale funds and charge their fee separately. Otherwise load charges are just a holdover for a pre-internet era where you really couldn't get any security product without paying a commission to someone who could sell it(whether you wre talking an individual stock or a mutual fund).

  You forgot that you may want the fund and paying the load is the only way you can get it.  It is the reason I have had to.  I wish I could buy the specific fund without the load.  

mikef07 said:     You forgot that you may want the fund and paying the load is the only way you can get it.  It is the reason I have had to.  I wish I could buy the specific fund without the load.  
  
I was literally just about to address that with an example. So here it goes(and everybody will understand this very well after this example).

Let's say we have abcd fund that exists both as a 12b-1 fee fund and a wholesale fund it will look something like this:

Loaded fund: 4% load, 1.4% annual expense fee. The portfolio managers keep 1% annual expense fee and pay the advisor that sold it the 4% up front load plus maybe .4% annually.

Same exact fund(same assets and manager and everything) as a wholesale fund: 1% annual expenses goes to the fund managers. 0 goes to the advisor that sold it.
The advisor than charges you let's say a separate 1% fee for services rendered. Now instead of paying 4% up front and 1.4% a year, you're instead paying 2% a year(1% for portfolio manager and 1% for advsor), and 0% up front. We'll come back to this.

But what if the fund you actually want is only available as a loaded fund. Well guess what regardless if you get any service from anybody you're going to be paying out a commission to someone. That's just what you have to do if you really want **that one**. Now it should be pointed out that since these fund managers are making the same amount as the 2 examples above then there should be no reason why a particular fund is more likely to 'have a better fund manager' there than in a lets say a no-load wholesale fund. There has to be some very inherent reason why you would want that particular one because based on any logic it should be no more likely that this commissioned structure would result in better fund managers than any other in terms of portfolio management. Furthermore, if you're going to buy a fund like this you might as well buy it from an advisor you like since at least then you'll get some services from them where as if you buy it from a Fidelity or a Schwab you're paying the firm, but they aren't actually going to really do anything for you service wise.


Now the key part here is that move from offering just commissioned mutual funds to offering the choice of both those and no load funds is that
A) You can now cut out any advisor/broker if you don't want to use them and just buy direct from a discount broker(Fidelity, Schwab, etc.).
and
B) Since the advisor is now having his comp broken out as a separate cost they're "switching their side of the table" so to speak. Where before they needed to focus on only mutual funds with 12b-1 commissions to their liking causing the portfolio managers to be sort of like 'gatekeepers to their compensation' they now no longer have any allegiance to the porffolio management companies. This causes them to then want to shop mutual funds that are cheaper in portfolio managers which is putting pressure on the portfolio management sector to reduce their annual expense ratios. So where as 10 years ago the typical portfolio manager got 75% of the fees and they handed the advisors the other 25% instead the advisors are now collecting their fee separately and taking 75% of the fees and shopping around to reduce the portfolio managers to only 25% of the fees taken(by selecting low fee funds). Now this is having the affect of squeezing the mutual fund industry while at the same time causing advisors to focus on less number of clients and higher service. This is really the only reason why the fee for service model has been a positive improvement over the commissioned/loaded/12b-1 model...is that they're throwing off the reliance of the portfolio managers as 'gatekeepers'.  It's not actually because the brokers/advisors were making more on the loads because arguably they're making more in margin now, but because the portfolio managers are getting squeezed which is good because they've shown time and time again that they don't actually deserve close to what they're charging(even more so now because if you are actually any good you usually work at a hedge fund and not a mutual fund).

I suppose paying your advisor via a load/kickback, assuming you want to pay the advisor for their services, is better tax wise at least for taxable investments. The fund load is essentially fully deductible since it reduces your profit (or increases your loss) when you sell.  If you wanted to deduct investment advising fees, you'd need to itemize and also exceed 2% of your AGI for a misc deduction to be worth anything. 

xerty said:   I suppose paying your advisor via a load/kickback, assuming you want to pay the advisor for their services, is better tax wise at least for taxable investments. The fund load is essentially fully deductible since it reduces your profit (or increases your loss) when you sell.  If you wanted to deduct investment advising fees, you'd need to itemize and also exceed 2% of your AGI for a misc deduction to be worth anything. 
  

Or you just take the accumulative fee for all assets and have it assessed against just the tIRA accounts. Wink, wink!!!

I think that fidelity now waives the load on some loaded funds from other companies.

This is all great info, thank you everyone...

I have to say that probably the most valuable thing I have learned on FWF is about low cost index fund investing. I have drank the kool aid and will never look back.

Costs really add up over time due to compounding and there is no shame earning the return of the market.

theman2 said:   I have to say that probably the most valuable thing I have learned on FWF is about low cost index fund investing. I have drank the kool aid and will never look back.

Costs really add up over time due to compounding and there is no shame earning the return of the market.

  Koolaid works for some, but I'll take the Red Bull and my chances beating the market . To each his own.

Load is known as the commission that an investor pays to a mutual fund at the time of purchasing or selling the shares of the mutual fund. Its better not to buy loaded funds. Though there are many reasons, the obvious one is : when a sales person knows that he is going to get a commission from a load fund, he will push the load fund more.



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

TRUSTe online privacy certification

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2014