can be a bit tricky and I have no idea of what you are using, but one thing I do with clients is the following:  Let's assume folks stay with the American Fund for 10-years.  Let's assume it cost 2.50% "A" shares to buy Fundamental if you buy Short Term Bond first and then switch to FI.  Works great in an IRA.  Assume the expense ratio with FI stays at 60 basis points--if we do 10-years then 0.25 (250 basis points divided by 10) + 60 basis points gives us a cost of 85 basis points. 

Is 85 basis points worth the fund and working with someone?  Your choice!  Life ain't too complicated and if you really work with an advisor (you ask for meetings--you ask for imput if you have 401-k or 403-B--you are somewhat aggressive) it can work nicely for you.

My imput yesterday (just understanding the trust and being able to explain it) was well worth it to this client.  One thing she says to me all the time is; "you explain things so I can understand--the trust folks talk over my head and make me feel I am imposing by asking questions."  Find someone you are comfortable with and there is a good chance you can have a good relationship.

Brian,

In my forced dealings with brokers far more unethical and incompetent  than someone like Al, whom I would easily and gladly pay the load for, on belhalf of family members, friends and our 403b's, I have had to run the numbers and examine results, over long terms, when the individuals didn't listen.

My conclusions are that A shares are the best buy although the numbers seem to come out the same when you run the spreadsheets over a long enough time period.  The gap is caused by how the amounts are computed.  On A shares, I pay upfront and have access to things such as reduced amounts for large investments but all of my capital gains and dividends are reinvested load free and I do not pay the "load" on growth of my assets.  It's the one time, up front reduction in the amount invested.

On B shares, I pay the additional amounts on all assets over a 5-8 year time period.  So I'm paying a "load" on dividend and capital gains reinvestments and growth of NAV.

A shares 5.75% on 10k.  I invest 9.5k

B shares 1% on 10k through the e.r.  At 10% av annual return in year 7, I'm paying 1% on 20k.  I've now paid a load of about $800 but it was hidden and I didn't see the upfront ding like with A shares so that I may have believed I was paying no load.  And I just see the growth that I had, not the fact that the A shares made 11%.

Companies like American and Franklin funds came to the B shares very late in the party since they knew the  numbers but finally had to offer them to compete with the likes of some high volume well known brokerages.  The SEC finally started making noises about the practices and the fact that there were people who had been with brokerages for more than 20 years and had no A shares b/c they always turned bad in year 7 and were replaced.  Now C shares, which never convert, are the choice du jour and what is pushed if you won't agree to an account with a 1-2% annual fee on all assets.

Roberta 

Hi Brian:

"I have some thought regarding buying a load fund over a no-load fund.  The load is meant to compensate an advisor.  You should typically only buy a load fund if you can benefit from an ethical advisor.  However, there may limited circumstances when a DIY'er may choose a loaded fund.

It might make sense if a fund is unique that it can not be found elsewhere, and no other fund or funds can fill this spot in ones portfolio.  So on this point, I say YES!"

The problem is, I have never seen that occur.  I don't see any loaded funds out there that can fill a spot in one's portfolio any better than an unloaded one.

As a young investor, your absolute main focus should be on asset allocation, diversification, and costs.  This is what will lead a DIY accumulator to financial success.

Lets take the venerable CAIBX.  Look at its long term record.  For an accumulator, adding money every month, you will constantly be paying that load on new money and the higher ER on old money even after you have overcome the original load.  Whatever your gains are over any period, they will always be 5.75% less than they would have been.

CAIBX has a 8.91% return over the last 10 years.  VG Global Equity fund has a 10.92% return over the same period.  Which was the better investment for a DIYer?

Don't be fooled by charts showing a $1,000,000 investment throwing off X amount of dividends and growing X amount with CGs reinvested.  You don't have $1,000,000 to invest at this point, and you are not planning on spending the income.  All you should care about is TOTAL RETURN at this stage.

I am convinced that Al is an honest and ethical representative of American Funds.  People out there really need his services and he should be paid for them.  But you, and most other knowledgeable DIYers don't.

If at age  58-59  you decide that living off dividend income  which is growing is a good strategy for you ( and I think it is a good strategy for almost anyone) then by all means consider taking that portion of your money and buy CAIBX.  Who knows, there may be an even better, no load version by then.

Just remember, on the day you retire, If you have more money in your nest egg than someone who invested in a load fund with growing dividends that you can't use as you accumulate, you can always buy his fund and have more shares and a higher income than he does.

Look for the best odds at the highest total return in line with your risk profile.

best,

Bill

to run the numbers is to simply use the hypotheticals provided by the American Funds.  They tell you everything in just a few minutes.  If we go back to miserable market years (1973 to begin) and run a 8 year hypo ("B" shares conver to "A" after 8 we see that with AMCAP (just an example) "B" shares give you $24,642.00 and "A" $24,564.00.  When markets are weak "B" works somewhat better because every dollar works for you up front. 

 

Comparing CAIBX to the Vanguard fund assumes they both have the same objectives.  I willl bet they don't!  CAIBX is quite unique and does what it is supposed to do and I assume the Vanguard fund does the same.  I just don't think they are set up to do the same thing thus a comparision might not be valid.  How does Vanguard Global Equity compare to Capital World Growth & Income which might have the same objective?  My year end Barron's shows WGI doing somewhat better for 5 years, but let's agree they are both fine funds.  I can show up on Sunday morning in the kitchen or you can work with someone on the phone--your choice--different strokes for different folks.

Bill & Roberta,

Thanks for your reply.  For the record, I was not planning on purchasing any load fund, unique or not!  I just thought it may make an interesting conversation and was wondering if anyone had any other ideas of why they feel purchasing a loaded fund was justified.  (Other than the need for an advisor!)  I totally agree with you, I think out of the myriad of funds to choose from, there are plenty of no-load funds to fill the need in ones portfolio.  Maybe for some people CAIBX is so unique that it makes sense, but not for me.  I think the idea of a fund being unique is a valid reason, but certainly not for me, not at this time.

Al,

You always seem to attempt to justify your work and the compensation you recieve.  I dont think it is necessary, most of us here (ofcourse I can really only speak for myself) understand this.  We know what a wonderful advisor and person you are :o)  It would take a fool to suggest that all people should invest on their own.  Some people really need this guidance.  Sure one could choose a "No nothing" portfolio of low costs, but IMO, the most critical role of an advisor is to keep the client on track AFTER the plan is established.  Take the DALBAR study for example.....need I say more on this?  Al, you are the MAN!

Regards,

Brian

 

AL Lindquist:

Someone like  myself actually receives .25% annually (divide that by 4 as it is paid out quarterly) wheter "A" or "B".  The cost for "B" shares for someone in Fundamental "B", as an example, is about 76 basis more than "A" shares.  Now actual performance shows "A" shares scored higher by 85 basis points last year; +13.55% to +12.70%.

 Hi again Al,

I am still struggling with this a little.  While I was working today, thinking about it, I think the light bulb went off.

I certainly believe what your saying, you know inner workings of AF and its advisors much better than me, thats for sure.  However, I think your answer was a little misleading or atleast not telling the whole story.  Your answer made it seem like there was no front load being paid and you only recieve the same 0.25% like with A shares.  Thats just crazy, and this would create a real problem with ethical behavior.

I have to assume, this works like an annuity, that AF fronts you the "front load" althought the investor never pays this up front.  The contingent deffered sales charge (CDSC) ensures that AF recoups its costs if the investor bails early, just like a variable annuity.  So technically speaking, perhaps you only get the same trail fee no matter what share class, but the investor still pays the load (or pretty close), you get the same compensation (or pretty close), and AF gets there same share (or pretty close) either through CDSC or the higher 12b-1 fee, depending upon time frame of investment.

Not disputing that you deserve your dough!  Just trying to understand the mechanics of the process!

I put this behind me a long time ago, I am not interested in deciding which class is best for me as I dont invest any new money in loaded funds.  This thread just re-kindled some interest in the topic.

I appreciate your participation in these conversations.

Hope this helping others better understand the alphabet soup.

"The truth is out there"

Brian

 

 

 

 

is nothing to struggle with as you are pretty much right on with your analysis.  Up to $50,000 the "A" shares pay out more while "A" and "B" each pay the same 12B.  I would sure like the 5.75% on up to $25,000 but can't remember the last time that happened. That's a bit much to ask someone to pay in my opinion.

You say I am correct, then I got confused with the rest.

Ofcourse, the net effect to client is the same, regardless of where the 12b-1 goes or how the commission is derived.  By simply knowing the loads (font end and CDSC), time to conversion and ER, we know how to choose a share class, regardless of the inner workings. 

I dont want to beat a dead horse, but just pacify me with one more reply and I will be happy :o)  I just want to clarify since I originally thought the advisor got a 1% trail fee on B shares, and I want to get my facts straight, sorry I am anal!  (I think you were agreeing with me, I could not really tell)

A shares:  customer pays front end load (which advisor gets a portion of), then advisor gets 0.25% trail.

B-shares:  AF pays advisor up front the portion of the load they would of got with A shares, then advisor gets the 0.25% trail.  AF makes up the fronted money, with the higher 12b-1 fee or CDSC, which ever comes first.

Hence the advisor still gets the same commission, or pretty close.  Correct?

Its not Zero for advisor upfront and then only 0.25% trail for B shares.  Your one earlier reply seemed to imply this by ommission.

I just think it matters, atleast to me.

Sorry if I am asking you to divulge trade secrets here.  I wont tell anyone :o)

Thanks again for your patience.

Brian