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 [...]