Two e-mails from readers hit on the same theme. Here's the first:
My husband just retired and consulted with his broker as to what to do with the money in his 401(k) plan, which is invested in no-load Vanguard mutual funds. His broker suggested rolling over the money into an IRA with the American Funds. The American Funds charge a 5.75 percent load. The broker told my husband he wasn't generating enough money in commissions for him.
And the second:
I put $4,000 into an IRA with American Funds through my brother, who is a financial planner. The transaction confirmation showed a sales charge of 5.75 percent. I asked why so much, and he said this is a standard charge for a mutual fund. Wouldn't I have been better off with a certificate of deposit? At least, they don't charge you to take your money.
The debate on load versus no-load fund has gone on for years and most likely will continue. What a shame. These two e-mails show pointedly what's wrong with the way many mutual funds are sold.
A no-load fund does not charge a sales commission when you buy or sell. A no-load either does not charge a so-called 12b-1 annual distribution charge or limits it to a maximum of 0.25 percent a year. A load fund charges a sales commission when you buy or sell and/or a distribution charge higher than 0.25 percent a year.
Both types of funds charge management fees and other annual operating expenses. The "load" is a separate charge to compensate sales personnel. The money does not go to the managers who make the actual investment decisions, and does nothing to improve fund performance. Despite what many brokers claim, load funds also frequently impose higher annual expenses than no-load funds.
People who sell load mutual funds often deride no-load funds as "no-help funds," implying that you are on your own.
With a load fund, they argue, you obtain the advice of a competent professional. Sadly, in some cases, the advice is so tainted by conflicts of interest as to be worthless, if not downright harmful.
The broker mentioned in the first e-mail was refreshingly candid about his need to earn commissions. Some advisers won't even tell clients there are such things as no-load funds (perhaps the case in the second e-mail?). Others fail to remind clients about "breakpoint" discounts (if your investments reach a certain amount, the sales load may be lower).
By contrast, advisers who don't charge commissions but are paid strictly for their advice, or who receive a percentage of the assets they manage, are free to recommend any fund. They usually prefer no-load funds (or load funds that waive their loads to advisers).
The American Funds, a favorite among brokers, have been solid performers for years. Even after paying a load, the odds are you will do much better over the long run with such a fund than with a bank certificate of deposit.
But the same could be said for any number of no-load funds from firms such as Vanguard, Fidelity and T. Rowe Price.
Let's not be naive: One reason American Funds are recommended so often is because they bring revenue to many firms that encourage their brokers to sell them.
In fact, investors have poured so much money into American Funds that many analysts worry some of the funds have become too big to maneuver successfully in the market and may have a hard time keeping up performance.
Bottom line? I prefer no-load funds, and I prefer advisers who are free to recommend them. Those who can't or won't, because their brokerage firm won't allow it or there isn't anything in it for them, are depriving their clients of good choices.
How do you find no-load funds? Paul Merriman, an investment adviser in Seattle, runs an "Explode Loads!" feature on his free FundAdvice.com Web site (www.fundadvice.com). Click on "Tools" to find it. Next to each of more than 100 popular load funds, he lists a no-load fund he considers a better alternative.
"When you're investing in a mutual fund, there's no advantage to paying a load, and, in fact, the opposite is true," Merriman said. "Our point is that thousands of excellent funds are available without requiring investors to pay sales commissions."
This is basic math: Assuming the same future performance after expenses, once you pay a 5.75 percent load, your account value will always be 5.75 percent less than if you had bought a no-load fund.
Humberto Cruz writes for Tribune Media Services.