retirement

Getting access to load-waived funds

Tuesday, March 9
Posted 2 p.m. Eastern

The mutual fund world is going topsy-turvy, and as a result, small investors like you and me will benefit.

The Wall Street Journal recently reported that do-it-yourself investors can buy certain load funds at discount brokerage firms without having to pay a load. This is a groundbreaking change in the way the fund industry does business. Setting aside any biases you may have against load funds for the moment, it's like getting into an exclusive club without having to pay a big membership fee.

The Journal reported last week that some traditional load funds offered by Eaton Vance, Federated Investors, Calamos and a handful of others have become available load-free in recent months at Schwab or TD Ameritrade or both.

You can hunt for specific load-waived funds at various discount brokerages, or you can find a slew of them all in one place. A new marketplace has opened up that enables you to access more than 2,500 load funds without having to pay the freight. For an annual fee of $250, InvestForLess.com offers more than 8,200 no-load and load-waived funds at Scottrade.

Isn't $250 a load, you may ask? It is equivalent to a 1 percent load for a $25,000 investment. That's not exactly chump change. But if you have more to invest, say $50,000 or $100,000, a $250 annual fee, as Alfred E. Neuman would say, is "cheap."

The ABCs of load funds

For the uninitiated, the mutual fund world is bifurcated into one of two groups: load or no-load. Investment firms generally offer one or the other, though some offer both varieties. To complicate matters, no-loads may carry a small load (of a quarter of 1 percent) and still be considered no-load, kind of like foods labeled "zero percent trans fats" may legally contain a small percentage of trans fats.

But the point is this: Self-directed investors generally buy no-load funds and shun load funds, while investors who need advice are often directed into load funds by commission-based or fee-based financial advisers. Some advisers put client money into no-load funds, but charge a so-called "wrap fee" of anywhere from 1 percent to 2 percent of assets annually.

To accommodate the myriad ways that advisers can get paid, fund firms have come up with multiple share classes. You've heard of them -- A shares generally come with upfront sales charges, B shares have back-end loads or redemption charges and C shares generally carry higher 12b-1 fees that, believe it or not, can be more expensive over the long run than A and B shares. To learn all about loads, the SEC's Web site offers a clear discussion about mutual fund fees and expenses.

A different model altogether

So how does InvestForLess.com fit in? CEO Kevin Knull says it uses the Costco business model, where members pay an annual fee of $250 to gain access to thousands of funds at wholesale prices. This turns upside-down the way business has always been done in the financial sector for decades. Usually, only very wealthy or big pension investors get away with paying the least amount in fees, while the smaller investor has to pay more expensive retail prices to get access to certain funds.

"The normal financial services model is built on the 'minimum number of clients with the maximum amount of revenue.' And our model is the opposite: We're looking to charge as little as possible but help as many people as we can," Knull says.

Now you may wonder why this is such a wonderful thing. After all, investors have access to thousands of no-load funds that never came with loads in the first place, and many of those have low expense ratios. So who cares about load funds?

That's a valid question. If you're perfectly content with the fund lineup that you have, this information likely won't or shouldn't affect you.

But a few years ago, I had my eye on the American Funds group, because several of their funds were going gangbusters. I refused to hire a commission-based adviser to gain access. Maybe I was being narrow-minded.

Below is a graph showing the growth of a $100,000 investment in the various share classes of Growth Fund of America if purchased on Jan. 31, 2005, and held for five years through Feb. 18, 2010, according to Morningstar. The illustration displays returns after fees were deducted. The fee-based account, with the lowest return, is actually the F-1 share class, but a 1.5 percent wrap fee was paid annually to an investment adviser in this hypothetical example. InvestForLess.com explains the fee structure in more detail on its Web site.

Growth of $100,000 over five years

Notice that your return would have varied enormously, depending on which share class you purchased. The F-1 share fared the best if you could have purchased it, costing only 0.69 percent.

"This is an example of a little-known share class that is only available in the RIA space," says Knull, referring to Registered Investment Advisers. "You must be a client of a registered investment adviser in order to purchase that."

Until now, that is. InvestForLess.com also has a roster of financial planners who can help investors seeking investment advice. They use a fee-for-service model, meaning the planners charge on an hourly or flat-fee basis rather than charging a wrap fee. (I mean, why pay a 1.5 percent fee for a few phone calls a year? Those are some mighty expensive phone calls!)

Be aware, though, that a $17 transaction fee applies to the purchase of roughly 3,200 of the no-load funds on the list of 8,200 funds at InvestForLess.com. So if you're not interested in accessing any of the load-waived funds, you'd likely be better off buying no-load funds elsewhere.

What would Bogleheads do?

You may also have noticed the comparative performance of the Vanguard 500 fund in that graph above. The index fund is a favorite of cost-conscious, no-load investors, particularly devotees of John Bogle, founder of Vanguard Group.

Let's not get into a discussion about what's better -- active or passive management. Arguments can be made on both sides convincingly.

Says Knull, "We're taking what Jack Bogle did a step further and saying not only are we going to offer no-load funds or index funds across the board at a very low cost, we're taking his work a step further and offering everything at no load. We just want to give access to the professionally managed funds as well."

More access to a wide universe of mutual funds, both no-load and load-waived funds, for a low fee is a good thing for small investors.

On a different subject: Check out Bankrate's new 2010 Retirement Guide.

Questions? Comments? E-mail boomerbucks@bankrate.com.

Read more Boomer Bucks blogs.

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