Early bird tickets for Baltimore’s BEST party on sale now!

No-load deals limited, but do have advantages


"A major brokerage is advertising that it deals with 200 no-load funds and will handle transactions for you," a Brooklyn Center, Minn., reader says. "Where do they get their profits?

"Would this be a good way of working with several mutual funds?"

He didn't identify the brokerage but, in fact, he could have been referring to either of two firms:

* Charles Schwab & Co., which advertises that it charges no transaction fees on purchases of "more than 200" no-load funds -- actually 225 funds of 25 fund families plus nine Schwab funds.

* Fidelity Brokerage, which advertises that it charges no transaction fees on purchases of "nearly 200" no-load funds -- actually 122 funds of nine fund families plus 71 Fidelity funds.

Through its "FundsNetwork," Fidelity offers many, if not all, of the equity and/or bond funds of Benham, Berger, Dreyfus, Evergreen, Founders, Janus, Neuberger & Berman, SteinRoe and Strong.

Schwab's "OneSource" program offers these firms' funds as well as those of Baron, Cappiello-Rushmore, Cohen & Steers, Federated, IAI, INVESCO, Kaufmann, Lexington, Montgomery, Oakmark, Rushmore, Skyline, Twentieth Century, United Services, Wright and Yacktman.

How do publicly held Schwab and privately held Fidelity expect to earn a profit on your purchases or redemptions of these companies' no-load funds if they don't charge customary brokerage commissions?

By charging the fund companies an annual fee, usually 0.25 percent of assets, out of which Fidelity and Schwab would be expected to see some income after paying for record-keeping, account statements, branch office costs, advertising and other services.

Checks from these funds aren't Fidelity's and Schwab's only incentive. They also expect to sell you their own funds as well as stocks, bonds and other funds for which you do pay commissions.

Since you don't pay additional fees when you buy these no-load funds through Fidelity or Schwab -- the 0.25 percent should not require increases in funds' operating expenses that would reduce their returns -- is this "a good way" to invest?

To some extent, yes. There are certain advantages, to be sure:

* You get only one periodic statement, instead of one or more for each fund family with which you have an account. You also get an average cost statement to help you calculate capital gains for your income tax return, which not all fund families (yet) provide.

L * You need to make only one call when switching among funds.

* You can have money transferred automatically from your bank account at regular intervals and invested in the funds you choose.

* You can place orders 24 hours a day, seven days a week.

* For a small fee, Fidelity will periodically mail you a report on any participating fund, especially prepared by Lipper Analytical Services, and Schwab will mail you a page from Morningstar Mutual Funds.

Both also send customers free comprehensive guides that compare fund performance.

You can, of course, contact the individual funds when you have )) questions that Fidelity and Schwab may not be able to answer.

The biggest shortcoming of the two programs? The absence of many other fine no-load funds, offered by companies from Vanguard, T. Rowe Price and Scudder down to the smallest. The discounters sell their shares, too -- but only for commissions. In the event any of such funds more closely meet your requirements and you want to avoid paying charges, you have to buy direct.

Why would some fund families participate and others not?

Direct marketers that have decided to stay out have done so for several reasons, including their conviction that they can generate plenty of business on their own and their desire to maintain direct contact with their shareholders.

They also say they can serve accounts for less than 0.25 percent of assets annually. Columbia Funds' "back office" costs, for example, are only 0.10 percent, says George L. Hanseth, senior vice president. (Others, though, look at the 0.25 percent fee as a way to cut costs.)

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad