Copyleft 2006. Michael Saville
If you pay a load, it's like throwing away most or all of the supposed benefit of having a salesperson choose a fund for you. If it's true that asset allocation makes up 95% of investment results over long periods of time, then having the "right" fund and the "right" manager only makes up 5% of the difference. But even if a salesman could help you choose the "right" fund, giving him a 5 percent commission would cancel out any benefit.
When you pay a 5 percent load, you will never be able to invest that 5 percent again. When you buy a load fund, the money you give to the salesman goes to work for him, not for you. When you put your money into a no-load fund, all of it works for you.
And the percentages of load are always higher than what is said. For instance, if $500 of a $10,000 investment goes to the sales organisation, then the remaining $9,500 is invested on your behalf. Funds can call this a 5% commission if they want to. In reality, you only put in $9,500, so the $500 load is not a 5 percent commission but a 5.26 percent commission on your real investment.
Loads carry more than they look like they do. Your commission makes a bigger difference over time. If you avoided a $1,000 commission by putting your money into a "no-load" fund, you would have almost $11,000 more after 25 years if your money grew at a rate of 10%. In other words, the $1,000 load would actually be worth $11,000.
The broker who helps you choose a fund may have a reason to want you to buy a fund that hasn't done as well instead of one that has. Studies show that the average performance of load funds run by brokerage houses, which are almost always load funds, is worse than that of load funds run by themselves. Still, a broker who sells house funds often gets exotic trips and other perks in addition to a bigger share of the commission. So, if you buy a load fund from a broker, make sure it isn't managed by that broker's company. Then you'll get more objective advice and, hopefully, do better.
Load funds have costs that are, on average, higher than no-load funds. All funds take these costs out of their assets, no matter how much their investors pay. Morningstar looked at thousands of funds and found that, on average, load funds charge their investors a lot more than no-load funds. The average expense ratio for equity funds with no loads was 1.1%, and the average for load funds was 1.6%. The average for bond funds was 0.6% for no-load funds and 1.1% for load funds. Those differences might not look like much. But unlike a load, a fund's expense charge keeps coming back every year. The longer you keep a high-cost fund, the more money it takes out of your wallet.
If you already have a load fund, what should you do?
You might not have to sell that fund. Once you have a load fund, the reasons for not getting one no longer apply. The reason is simple: once you pay the bill, you can't get your money back. If you leave the fund, you won't get it back. Since you are already in that situation, there is no reason to sell that fund just because it has a load.
You don't have to keep the money either. If the fund has a back-end load, you may be more likely to leave your money in that fund because of that feature. Back-end loads are sometimes set up so that the fee goes down the longer you keep your money in the fund. You should look at the prospectus or ask someone for help to find out. Or, you could call the fund and ask what your choices are.
Don't keep a fund just because it has a high load on the back end. Even if you keep a fund with a back-end load for long enough to avoid most or all of the load, the salesperson still got paid the commission. The fund found a way to get that money from you to pay for the cost of its commission. This could be one reason why load funds charge their shareholders more than other funds. You may also have to pay 12b1 fees every year to cover the cost of marketing. If this is true, you may have to pay those fees every year that you own the fund.
In short, the fact that a fund has a load is not enough reason to sell or keep it. The decision depends on the details of the load, your own situation and needs, and the quality of the fund itself.
