Avoid mutual funds and ETFs with sales commissions and marketing fees
Summary: There is no convincing evidence that sales loads and other sales fees charged to investors result in higher mutual fund and ETF performance.
In fact, the opposite has repeatedly been proven true with mutual funds, which have a long performance history to evaluate. Paying a load just means that you are throwing your hard-earned money down a hole.
Front-end and back-end loads, 12b-1 fees, and other sales compensation charges only ensure that an advisor and his/her advisory firm will be compensated for guiding you to select funds that will pay these fees. Front-end loads reduce the amount that will be invested in the fund on your behalf. You will have less money invested and fewer assets upon which to earn a return. Back-end loads allow funds to take away a share of your future returns. Funds with front-end and back-end loads also tend to charge higher annual fees. Marketing fees sometimes known as 12b-1 fees are additional periodic sales charges that further reduce your ongoing returns. Assessed over time, 12b-1 fees pay a sales agent for periodic “servicing.”
None of these loads, higher fees, and sales charges will be applied in any attempt to improve on a fund’s investment performance.
There is zero connection between the management of the fund and the extra sales loads, higher expenses, and marketing fees that you pay. There is absolutely no reason to believe that the fund will perform any better to compensate for these charges. Because securities markets are generally efficient, superior performance is largely due to luck rather than skill and superior performance tends not to persist. On average across funds, sales loads are a deadweight loss to you due to market efficiency and the fact that the loads you pay are not even applied toward improving performance.
All a sales load will guarantee is that there will be a paid sales person to tell you that the fund that they are trying to get you to purchase is a ‘better’ fund.
While advisors will most often be careful to avoid specific promises about future performance, they will not hesitate to provide materials that may indicate superior past performance and perhaps a 4- or 5-star Morningstar Rating. This game is easy to play, because only mutual funds and ETFs with past “superior” performance will be promoted by the advisor. Other funds will be conveniently ignored. When performance changes in the future, new ‘better’ funds will be promoted and past ‘better’ funds that did not turn out to be better will be ignored. (See: How Morningstar Ratings for mutual funds are used as a marketing tool and What might be wrong with buying a mutual fund with a 4 or 5 star Morningstar Rating? )
When you screen equity mutual funds, just eliminate all front-end loaded mutual funds from consideration.
There are thousands of fine no-load funds available. Ignore the sales pressure of any agent/advisor who pushes mutual funds with loads, marketing charges, and higher expenses.
Note that certain very limited back-end loads can sometimes be beneficial to you, but only if they expire quickly and are designed to prevent costly active trading in and out of the fund by other investors who exploit buy and hold investors. Accept only short duration back-end redemption fees that are highly unlikely to affect you (months and not years). You should be certain that you can stay invested in the fund long enough for the redemption penalty period to expire. Furthermore, ensure that all redemption proceeds from other early-exit investors will be returned the fund’s investment pool for the benefit of its longer-term shareholders.
In addition, do not ignore additional fees such as account wrap-fees charged by full-service brokers. It is unnecessary to pay these fees to purchase mutual funds and ETFs. If you have sufficient initiative to research mutual fund alternatives, then you can get a large extra financial payoff by purchasing directly from the mutual fund. Investing directly in funds that you select yourself is very straightforward.
All mutual fund families that allow direct investments have toll free customer service telephone numbers to request forms to be sent through the mail.
In addition, they have downloadable / printable forms on their websites. Filling out and mailing in the forms is only mildly tedious. However, when you do it yourself and you do not pay a commission to purchase through an advisor, you pay yourself a very high hourly wage for the relatively quick and painless process of purchasing directly from the mutual fund.
Exchange-traded funds are also very easy to acquire. Just use a discount broker to keep your transaction costs down. Furthermore, to amortize these brokerage transactions costs only buy broadly diversified, very low fee, index ETFs that you intend to hold for a long time. While somewhat different, ETFs and mutual funds share many similar characteristics. However, one disturbing trend with ETFs has been the far more frequent trading of ETFs, which drives up trading costs and taxes unnecessarily.
Also, if you want to understand the personal impact of investment expenses, take a look at VeriPlan. VeriPlan’s ability to project your full lifecycle investment costs can be incredibly useful to you. Your personal VeriPlan projections automatically analyze the impact of five types of investment expenses across your lifecycle: 1) purchase fees, 2) fund management fees, 3) marketing fees, 4) transactions costs, and 5) account custody fees. To analyze the lifetime impact of excessive investment costs, VeriPlan also allows you automatically to switch back and forth between projections that use your portfolio’s current investment costs and projections that use costs that you think are reasonable to pay. For more information, see: VeriPlan helps you to understand the full lifecycle cost to you of excessive investment expenses
Click here to find out more about Financial Planning Spreadsheet
Personal Financial Planning
- The Cost of Investment Counselors When You Pay Investment Sales Loads (How expensive is financial advisor compensation paid via sales loads?
A sales load might be the method that you prefer to compensate your broker or advisor. If your advisor is truly competent and ethical, he may be able to manage properly the inherent conflicts of interest that are associated with commissioned investment product sales. Even if [...])
- The Fund Authority Score – A Better Mutual Fund and ETF Rating System (Fund Authority Scores rate mutual funds and ETFs on the most important economic factors influencing long term diversified investment fund performance
The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective mutual fund and ETF comparisons within investment asset classes.
Fund Authority Scores measure investment fund cost, maturity, efficiency, and [...])
- Searching for Superior Investment Fund Managers is a Waste of Your Time (
Searching for superior investment fund managers is a waste of your money and time
A previous article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that individuals are much better off with a well-considered financial viewpoint. A stable set of financial beliefs [...])
- Make More Optimal Tradeoffs Between Investment Risk and Return (VeriPlan helps you make more optimal decisions about the tradeoffs between investment risk, investment return, and personal savings
Too often decisions about risk-adjusted investing and asset allocation are over-simplified with a few questions about your risk tolerance. Typically, this superficial process will be followed quickly by the offer of a canned, off-the-shelf asset allocation scheme and [...])
- Taking the Snake Oil Out of Mutual Fund Evaluation (Superior mutual fund and ETF performance charts are the sales tools of modern financial snake oil salesmen
Historical performance charts allow investment fund promoters to market selectively their supposedly superior funds and to allege that their excessively high fees are worth it. Lured in by superior past performance, most often individual investors will get mediocre future [...])
- Set your personal savings and other financial goals – Step 2 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION."
The single most significant financial lever that individuals control directly is their management of personal expenditures. The second is their lifetime effort to obtain sufficient income. Most people simply do not save enough of their current income [...])
- Choose Sufficiently Mature Mutual Funds and ETFs (Choose sufficiently mature mutual funds and ETFs
Investing in more mature equity and bond mutual funds and exhanged-traded funds (ETFs) allows you to evaluate the historical consistency of a fund's record.
On average, the future portfolio returns of more mature funds are probably no more predictable than for very young funds with a similar style or strategy. [...])
- The Quality and Cost of Advice Paid by Investment Sales Loads (Can you really get free and objective investment advice, when you pay investment sales loads?
Excessive investment expenses are one of the most significant barriers to your family's lifelong financial security.
Excessive investment costs are a plague on your personal financial planning. While financial services industry sales people tell you that you need to pay more to [...])
- Chance creates the illusion that individual investors can beat the stock market (
"Market efficiency" makes it very difficult for individual investors to "beat the market."
Making their own decisions, individual investors perform so poorly that on average their investment returns lag behind the returns that one would expect from random stock selection.
The average professional trader does somewhat better than amateurs do, and professionals probably do so, in part, [...])
- Schwab S&P 500 Index Fund – Select Shares (SWPIX) achieve a +8 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise, objective, and realistic summaries of mutual funds and ETFs for comparisons within [...])
- 10 Lower Cost S and P 500 Index Mutual Funds (10 Lower Cost S&P 500 Index Mutual Funds
Regular readers know that The Skilled Investor advocates a very boring, low cost, broad market, passive index investment strategy. Costs less. Gets the broad market return -- whatever that will be. Narrows the range of outcomes and therefore the risk to your long-term personal financial plan. Takes far [...])
- Allocate investments across the primary asset classes – Step 5 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Appropriately setting your personal investment asset allocation in line with your personal investment risk tolerance is a critical decision for every individual investor.
Because the average risk-averse investor holds the average portfolio asset allocation, this becomes the starting [...])
- Automated Tool Aligns Your Investment Risk Tolerance and Asset Allocation (Check out this automated tool for aligning your investment risk tolerance and asset allocation - A Tip from The Skilled Investor
Your tolerance for investment risk is a relative thing. Few people like investment risk, but some can handle it better than others can. The more investment risk you are willing to tolerate, the higher your [...])
- USAA S&P 500 Index mutual fund Member Shares (USSPX) capture a +9 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for USAA S&P 500 Index mutual fund Member Shares (USSPX).
The diversified investment fund strategy of the USAA S&P 500 Index mutual fund Member Shares (USSPX)
According to its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the [...])
- Set a Minimum Portfolio Size Threshold for Mutual Funds and ETFs (
Choose mutual funds and ETFs with a minimum economical portfolio size
If you are going to invest in actively managed funds, then you should want them to have a sufficiently large asset base to fund the necessary research.
If an active fund is too small, then fund management quality can suffer or fees could grow. Index funds [...])