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Sales Loads: Avoiding These Can Save Investors A Lot Of Money

Mutual fund sales charges, a.k.a. sales loads, are one of the fees investors should never pay. By reading this article, you'll be able to spot these hidden fees and improve your investment returns simply by taking some simple steps.

Mutual funds come in two main categories: Loaded funds with sales charges and no-load funds with no sales charges. When a broker recommends a fund for one of her clients to buy, that fund will likely be a loaded fund, and the load is kept by the broker as payment for the "service of helping you pick the fund".

These sales loads often range from 1% to 6% for each purchase (or sometimes the sale) of a mutual fund. Simply not paying these fees by choosing no-load funds or other low-cost investments like ETFs (Exchange Traded Funds) could potentially improve investment returns by several percentage points per year.

So how do you spot these sales loads? At this point, you'll want to pull out your most recent investment account statement to look at the holdings/investments you own. If you own mutual funds, look for the words "Class A, Class B, or Class C" or "Cl A, Cl B, or Cl C" following the name of the fund. You might see something like "Global Dividend Fund Cl A". If you see this - you are paying sales loads and it's time to take action.

Now that you know if you're paying sales loads or not - you need to know how to avoid them and what they mean to your investment performance? To avoid sales loads, you have a few choices:

1) Choose no-load funds if possible from your investment manager, they can provide a list of options
2) Work with a fee-only advisory firm that acts as your fiduciary and works to avoid fees that hurt performance
3) Use ETFs (Exchange Traded Funds) instead of mutual funds, which have minimal expenses and no loads

Loaded funds have no record of outperforming no-load funds regarding annual performance. In fact, according to a recent survey by investment data firm Morningstar, even excluding the drag on returns if the load were included in the calculation, no-load funds actually have a superior record to loaded funds.

That's worth repeating. Funds that impose no cost to purchase have outperformed those that brokers pay themselves sales loads to find for their clients.

Sales loads come in 3 main varieties:

  • Front-End Loads - When you buy the mutual fund each time (which can really add up biweekly for retirement plan contributions) you pay a sales charge, often around 5%. So you immediately lose a big chunk of your money.
  • Back-End Loads - Because giving away 5% of your money for nothing is such a bad deal for investors, mutual fund companies developed something trickier. The back-end load (or the euphemistically named "contingent deferred sales load") is simply a full sales load that is charged over time. Instead of charging a 5% fee up front, the fund company will charge a 5% fee if the shareholder leaves the fund in the first year. This exit fee will decrease each year by 1%; but unfortunately the fund is also charging another unrelated fee, called a 12b-1 marketing fee each year.  
  • Level-Loads - This type of load, designated as a "class C" share, usually charges an even 1% in 12b-1 fees each and every year you own the shares. Though there is either no up-front load or a very small one (around 1%), because 1% is taken away in fees every year, the level load ends up being the most expensive type of load. 

Some companies have even created internal "coding" for different sales loads such as R-1 through R-4. These fees are even more difficult to understand than the ones listed above.

Is this confusing enough? The mutual fund industry wants it that way.

If you've never heard your broker mention these fees or seen a clear breakdown of them on your statements, don't be surprised, this is common. Statements almost never show the total loads charged or their effect on performance.

The answer to these fees can be simple. Again, the best ways to avoid sales loads is to work with a fee-only advisory firm, find no-load funds with your current provider, or maybe invest with ETFs. This "simple" task of avoiding sales loads will boost your nest egg considerably over time and improve your annual returns.

Bottom Line - you're now educated on these horrible hidden fees - don't pay them ever again.

 

Disclosures

This article is for informational purposes only and should not be taken as instruction or solicitation to buy or sell any security. Investing in securities involves risks that may result in financial losses. Past performance does not guarantee future results.

A full description of investment advisory fees is supplied in our Form ADV. Performance figures shown at www.ebertcapital.com/model-portfolios/ reflect the inclusion and reinvestment of dividends and other earnings.