MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
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How to Evaluate Load vs. No Load
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
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.
© Ulli G. Niemann