How to Evaluate Load vs. No Load Mutual Funds
by Ulli G. Niemann
If you have been dealing with mutual funds for any length of
time, you undoubtedly have faced the question of which is better:
Load Funds or No Load Funds. If you are new to investing, "load"
simply refers to the commission paid to the broker selling the
fund. "No load" means there is no commission on the purchase or
sale.
Most discussions in the past have centered exclusively on
performance comparisons. Even rating services like Morningstar
have occasionally chimed in with their opinion. However, rather
than focusing only on performance, there are some other issues
I consider far more important:
1. Who is selling load funds and why?
2. Who markets no load funds?
3. Which one is right for you?
Who is selling load funds and why? Most load funds are being
sold through brokerage houses, financial planners and Registered
Representatives. With few exceptions, most of those folks operate
on the basis of selling as much product as possible. They collect
their commissions up front, as a back end charge, or both
(usually in the range of 5 - 6%). Whether you make money or
not is not their primary concern. What matters most to those
operating under this approach is how often you buy—and thereby
generate new commissions for them.
Who markets no load funds? No Load funds are either marketed
directly by the mutual fund companies or, more commonly these
days, offered through discount houses like Schwab, Fidelity, and
many others. The advantage to this is that you have an unlimited
choice of funds in one place and don't have to open separate
accounts for each mutual fund family that you are considering.
Most fee based investment advisors, like myself, have independent
relationships with such major discount firms and are able to
offer clients just about any no load mutual fund available.
They receive no compensation from the firm and only get paid
by the client at a pre-determined fee arrangement. Under this
arrangement, there is no hidden motivation to sell you a
particular fund or to try and sell more in order to get a
larger commission.
Which one is right for you? Whether you prefer dealing with
someone selling load funds or an advisor getting you into no
loads, let me make one thing very clear: You can make money or
lose money either way! Why?
Let’s assume for the moment that there is no difference in
performance between the types of funds—some of either kind will
do well and some of either kind won't. What then determines the
successful outcome of you buying either a load or a no load fund?
The key is the advice you’re getting. And the fact is that many
brokerage houses and Registered Representatives tend to be more
interested in their profits than yours. Their investment advice
is generally centered around Buy and Hold or dollar cost
averaging and similar financially questionable recommendations.
Hardly ever will you receive advice about when and why you
should exit the market, either because of accumulated profits
or to limit your losses. Getting out of the market is simply
not in their best interest, though it may be in yours.
I must confess that, as a fee based advisor, I am somewhat
biased and I prefer no load funds for my clients. I believe that
this type of arrangement is best for all parties involved. It
allows me to avoid any conflict of interest and to work
exclusively for my clients’ financial benefit. And the better
my clients do, the better I do.
I am able to choose no load funds and make buy decisions solely
on the basis of my mutual fund trend tracking methodology.
Following its signals, I can get clients into the market or out
of it as often as is necessary to maximize profit or protect
assets. And because I work with no load funds, other than a very
occasional short term redemption fee, there are no transaction
charges no matter how many times we move into or out of the
market.
If market conditions dictate that we stand aside in a money
market for an extended time in order to avoid a bear market (as
was the case from 10/13/2000 to 4/28/2003), I can advise that
because it is in the best interest of my client. I am always
thinking about what will benefit my client, not worrying about
lost commissions. (Please see my article "How we eluded the
Bear in 2000.")
Bottom line: Load fund vs. No Load mutual fund shouldn’t be the
issue. Having a methodical plan and reliable advice as to when
to buy and when to sell is far more important and will help you
to secure a prosperous financial future.
Copyright 2004, Ulli G. Niemann
Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit:
http://www.successful-investment.com
