The load is really a commission paid to the brokers/salespeople who peddle the load funds (the fund advisors sometimes keep a small cut of that load).  I can't see a reason to buy any Load fund.  Why pay a sales commission?

Both No-load and Load funds make their money off the Mgmt fees - and some get "cute" with their 12b-1 fees. 

-Joe

 

One of the ideas behind load funds is that the broker/advisor adds value (a highly debated idea) to your investment process.  If you are not interested in doing any research on funds or portfolio building and want someone to facilitate the process for you then a broker sold load fund fits the senario. Loads are the commission paid to the broker for their services on your behalf. If, on the other hand you are an investor interested in managing your own investments, doing your own research, and building your own portfolio then you are wasting your money on traditional broker sold load funds. To me the issue of load vs no load funds is not a question of which category of funds is better but rather a question of whether or not one wants an advisor or prefers to personally direct their own financial affairs. In this day and age there are many wonderful books, blogs and self directed brokerage accounts to well equip the serious individual investor for success.

lawmanlou:

Will someone please settle the question of buying no loads verses buying load funds? How do the no loads make their money if they don`t charge a load? Is it higher expenses that make up the difference?

A mutual fund does not make money in the sense that a person who owns a business makes money when the business has a profit.  A mutual fund is owned by those who invest in shares of the fund.  Any money made by a mutual fund increases the value of the shares of the mutual fund.

The board of directors of a mutual fund (acting on behalf of the shareholders of the fund) contract out the day-to-day running of the fund to others, such as investment managers, shareholder servicing agents, and fund share distributors.  Those other make money from the fees that the mutual fund pays them for the services they provide.  It is those others who make money from the fund, not the fund itself.

The difference between load and no-load fund is whether the fund share distributor charges a fee to shareholders of the fund when the shareholders buy or sell shares.  The distributor may even charge shareholders of the fund for holding fund shares (12b-1 fees).

While negotiating a distribution services contract, it is up to a distributor whether to ask a no load fund for a higher fee than it would ask from a load fund.  A distributor has to weigh the lower income of distributing no load shares (due to loads not being paid to it) versus the higher cost of distributing load fund share (due to paying brokers to sell fund shares).

Pat Morgan:

lawmanlou:

Will someone please settle the question of buying no loads verses buying load funds? How do the no loads make their money if they don`t charge a load? Is it higher expenses that make up the difference?

 

The board of directors of a mutual fund (acting on behalf of the shareholders of the fund) contract out the day-to-day running of the fund to others, such as investment managers, shareholder servicing agents, and fund share distributors.  Those other make money from the fees that the mutual fund pays them for the services they provide.  It is those others who make money from the fund, not the fund itself.

I invested in American Funds with an amount sufficient to avoid any loads.  Every penny of my money was invested.  My average ER on my funds is about .60, which includes the 12b-1 to my FA.  I was told that the firm for which my FA works got a 1% onetime commission from American which I will have to repay to American if I leave before 1 year.   I met with my FA on and off for 3 years before I invested any money with him.  We discussed lots of investment options and he got to know me and my wife and our risk tolerances.  We ran dozens of hypothetical portfolio analyses and monte carlo simulations.  I talk to my FA at least once a week.  He sends me articles, gets me hypotheticals from any fund so I can do my own spreadsheets, and will research most any question I ask him about annuities, mutual funds, ETF's, index funds, etc.  And yet, many of the members of the forum bash loads.  It makes me think they think I'm stupid for investing with American.  I don't get it.

Playbook.

playbook. I appreciate your particular circumstances,  but come on: a)You paid NO load; b)Your E/R is 0.60%; c)Your CDSC goes away after 1 year (meaning you will then TRULY have a NO-load investment.  The size of your investment is such that your advisor contacts (fawns over?) you weekly.

A typical (smaller) investor would lose almost 6% of his capital upfront, and 6% on all future contributions.  Said investor would likely NOT receive the liberal time from his advisor.  I cannot see a typical advisor willing to invest 3 years of his time hoping to get the business of a wage-earner.  AND contacting his entire customer base every week. Your FA smells lots of money from you.  That's his job, its not meant to be pejorative, just matter-of-fact.

PB, if we all had deals like yours, I doubt there would be much criticism of loads.   The fact that such special deals can/are cut suggest that we small fries are quite right to steer clear and leave the "loads" to the priviledged classes.

More generally,  this is not a criticism of AF's funds, but of the distribution system they use  ---  I note that some No-load funds also offer loaded-versions of their funds.. perhaps AF should do the same -- let those who wish to utilize the services of a FA do so, and remunerate them for their value-added.  And let those of us who just need the investment vehicles, and no hand holding, have that choice.... 

 

playbook:

I invested in American Funds with an amount sufficient to avoid any loads.  Every penny of my money was invested.  My average ER on my funds is about .60, which includes the 12b-1 to my FA.  I was told that the firm for which my FA works got a 1% onetime commission from American which I will have to repay to American if I leave before 1 year.   I met with my FA on and off for 3 years before I invested any money with him.  We discussed lots of investment options and he got to know me and my wife and our risk tolerances.  We ran dozens of hypothetical portfolio analyses and monte carlo simulations.  I talk to my FA at least once a week.  He sends me articles, gets me hypotheticals from any fund so I can do my own spreadsheets, and will research most any question I ask him about annuities, mutual funds, ETF's, index funds, etc.  And yet, many of the members of the forum bash loads.  It makes me think they think I'm stupid for investing with American.  I don't get it.

Strictly speaking, the 1% onetime commission is paid to your FA's firm by American Funds Distributors, whose parent company is the investment adviser of the fund, Capital Research and Management Company, which is a wholly owned subsidiary of The Capital Group Companies, Inc., which is a holding company for America Funds and other investment management firms.  The details are in the prospectus and the Statement and Additional Information of the fund.

Exactly where in the quotes that you included from me and lawmanlou was there bashing of loads or the implication that you are stupid?

No one in this particular post bashed loads or said or implied that I am stupid for dealing with American.  I should have made that clear.  Sorry.  I was referring to other posts on this subject.

Playbook. 

Excellent post Edmund.   To more generalize your second paragraph, if some study would show that the set of 5.75% front end load, diversified, pseudo-random, actively managed funds outperformed the similarly diversified set of no load funds by more than 5.75% per contribution, then the loads would be justified.   Since statistics on performance do not show that, personal services aside, the no load funds are at least as good as the load funds, but without the immediate setback.

........

How does one go about setting up one of these self-directed brokerage accounts?

Why are you debating this on an American Funds forum? These are load funds, you can't (in most cases) buy them without paying a load. For you folks talking about how it doesn't make sense, why are you wasting your time here?

 American funds ongoing expenses are extremely low. They are around .70% on average. For most actively managed no load funds you pay more in ongoing expenses. When you add the ongoing expenses using a calculator such as the Finra mutual fund expense calculator you will see that over a 10yr period you usually pay out less with American even with the maximum load. In many cases, if you meet the breakpoints, you pay out significantly less with American funds.

Some people value professional advice and many like the fact that American Funds consistently rank in the top 10% of their categories over 5 and 10yr periods. Just read the Barrons article on Mutal fund families. They have consistently ranked at the top for 10 year returns and they have been managing money for 75 yrs.

 You geeks out there who waste time on a load fund board need to do something else with your time like study for the Series 7 or CFP exam. Geez.
 

 

You actually gave this"geek" the answer he was looking for better than anyone else! With over the 10 year period and that calculator stuff, tell me more about that calculator!