If you have been trading mutual funds for some time, you have no doubt been faced with the question of which is better: load funds or no-load funds. If you’re new to investing, “load” simply refers to the commission paid to the broker selling the fund. “No load” means that there is no commission on the purchase or sale.
Most discussions in the past have focused exclusively on performance comparisons. Even rating services like Morningstar have occasionally weighed in with their opinion. However, instead of just focusing on performance, there are other issues that I consider much more important:
- Who sells load funds and why?
- Who markets the no-load funds?
- Which of these is right for you?
Who sells load funds and why? Most load funds are sold through brokerage firms, financial planners, and registered representatives. With few exceptions, most of these people operate on the basis of selling as many products as possible. They collect their commissions up front, as a late charge, or both (usually in the 5-6% range). Whether or not you make money is not your main concern. What matters most to those who trade under this approach is how often you buy and thus generate new commissions for them.
Who markets the no-load funds? No-load funds are marketed directly by mutual fund companies or, more commonly these days, are offered through discount houses like Schwab, Fidelity, and many others. The advantage of this is that you have an unlimited selection of funds in one place, and you don’t have to open separate accounts for each mutual fund family you’re considering.
Most fee-based investment advisors, like myself, have independent relationships with major discount firms and can offer clients just about any no-load mutual fund available. They do not receive compensation from the company and are paid only by the client based on a predetermined fee arrangement. Under this agreement, there is no hidden motivation to sell you a particular fund or to try to sell more for a higher commission.
Which of these is right for you? Whether you prefer to deal with someone who sells load funds or an advisor who helps you not load, let me make one thing very clear: either way you can make money or lose money! Why?
Let’s assume for the moment that there is no difference in performance between the types of funds: some of any type will do well and some will not. So what determines the successful outcome of buying a loaded or unloaded fund?
The key is the advice you are receiving. And the fact is that many brokerage houses and Registered Representatives tend to be more interested in your profits than their own. Their investment advice generally focuses on buy and hold or dollar cost averaging and similar financially questionable recommendations. You will almost never receive advice on when and why you should exit the market, either for accumulated profits or to limit your losses. Exiting the market is simply not in their best interest, although it may be in your best interest.
I must confess that as a fee based advisor I am somewhat biased and prefer no load funds for my clients. I think this type of arrangement is better for all parties involved. It allows me to avoid any conflict of interest and work exclusively for the financial benefit of my clients. And the better my clients do, the better I do.
I can choose no-load funds and make purchase decisions solely based on my mutual fund trend-following methodology. By following your signals, I can get clients in or out of the market as many times as needed to maximize profits or protect assets. And because I work with no-fee funds, other than a very occasional short-term redemption fee, there are no transaction fees no matter how many times we enter or exit the market.
If market conditions dictate that we stay on the sidelines in a money market for an extended time to avoid a bear market (as was the case from 10/13/2000 to 4/28/2003), I can advise that because you are in the best interest of my client. I am always thinking about what will benefit my client, not worrying about lost commissions. (See my article “How We Dodged the Bear in 2000” at http://www.successful-investment.com/articles12.htm.
Bottom line: background loading vs. The no-load mutual fund shouldn’t be the problem. Having a methodical plan and reliable advice on when to buy and when to sell is far more important and will help ensure a prosperous financial future.
© by Ulli G. Niemann
