Loaded fund, no load fund: What’s the difference?
The difference is about 4.5 percent, give or take, out of your pocket.
In addition to the expense ratios that all funds carry in order to pay the people who work at the fund, if an adviser suggests you purchase a fnnd and you do so through him or her, you will also pay the adviser a commission. The commission can cost anywhere from 2 percent to 8.5 percent; the average commission is about 4.5 percent. The commission is known as a load. Think of it as a burden on your money.
A no-load fund, on the other hand, is a mutual fund you buy directly, without an adviser, and therefore there’s no commission attached to it. In my opinion, no-load mutual funds are the only way to go. Think about it. If you were to invest $10,000 in a no-load mutual fund and decided, two seconds latei that you wanted to withdraw your money, you’d get all $10,000 back, assuming the market didn’t move. Loaded funds, on the other hand, would cost you.
The Price of a Load
There are two kinds of loads, a front-end load and a rear- end load (also known as a 12[bjl charge). Sound confusing? It’s meant to be. The people making this money, your adviser or broker, would rather you didn’t know how much you were paying.
Front-end loaded funds charge a load up front. They are also identified as A share mutual funds. When you see the name of the fund spelled out anywhere, if it has an “A” or says “A shares” after the name, then you know it’s a front-end loaded fund. If you invested $10,000 in a 5 percent loaded fund, and decided two seconds later to withdraw your money, you would get back only $9,500—the adviser got that $500. This fund would have to go up 5 percent in value just for you to break even.
Rear-end loaded funds are even worse.
When mutual funds first came onto the scene, you could buy one only through a broker, so they were all loaded funds. Over the years, though, many mutual fund companies came out with no-load funds, and slowly but surely investors began seeing their value and investing. This migration was putting a big dent into the profits of brokerage firms that sell pnly loaded funds, so they came up with a way to make you think you could buy a no-load fund through them: It’s called a 12(b)1 fund.
A 12(b)1 fund is a mutual fund usually sold to you by a financial adviser. Some of these advisers sell you these funds under the pretense that you are not going to pay a load to be in the fund as long as you stay in it for five to seven years. If you cash out before then, there will be, the adviser will explain, a “surrender charge” starting at around 7 percent and going down by 1 percent each year until it reaches 0 percent. (In a true no-load fund you can cash out the same day without paying a penny.) Not too bad, you might think, since I plan to leave the money in there for a long time anyway, so it won’t really cost anything. Wrong. You will also be paying an extra .75 percent to 1 percent a year in 12(b)1 expenses year in, year out. What this means is that if your fund makes a return of 10 percent, you would get only 9 percent after the 12(b)1 charge, and you’ll continue to pay that percentage for as long as you stay in the fund, even after the seven years are up. In fact, if you stayed in the fund for fifteen years, and were paying 1 percent for the privilege of owning your 12(b)1, you wøuld in essence have paid a 15 percent sales commission. You would even have paid about 10 percent more than what a front- loaded mutual fund would cost. And, of course, you would have paid 15 percent more than what a good no-load fund would have cost.
This 12(b)1 fee is in addition to the other fees as well. You’ll also have to pay the management fees and other expenses of the fund, just as you do with a no-load fund. So the 12(b)1 fees are put in place to pay the adviser’s fee for having sold you the fund. How it works is that you buy the fund, the brokerage firm advances the broker’s commission to him the day you buy it, and you keep paying and paying so that the firm will get back the money they paid to the broker. Your 12(b)1 fee is how they get the money back. If you close the account early, your surrender charge is what guarantees the company it will get back more than it pid the broker: a no-lose proposition for the brokerage firm, but you lose all around.
In other words, 12(b)1 mutual funds are a rip-off. If you see a “B” or “B shares” after the name of a fund, or if your adviser says you have to stay in a fund for X years or pay a surrender charge—you have a 12(b)1 fund.
Why Would My Adviser Sell Me These Funds?
Because that’s how he or she makes a living, and you’ve not chosen an adviser wisely. True financial advice is to tell the client how to get the most bang for the buck, even if it means the adviser won’t make a lot of money with the transaction. Advisers are there to help you get rich, not to get rich off you. It’s the adviser’s fiduciary responsibility to tell you if there’s a less expensive way for you to make money—and give you the choice of what you want to do after explaining how much each of your options will really cost you.
But no-load funds can be purchased without the help of an adviser—no middleperson, no commissions, no hidden costs, just smooth sailing to greater and greater wealth over time. Do you need an adviser? If after reading this next section you feel you do, then you do, for your own peace of mind. But you may just want to test the waters yourself. . .
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