Should I Buy a Loaded Mutual Fund?
My mother is not very financially savvy – and when I try to explain anything to her; it can often times take the better part of an hour. It may be her age or the fact she never had any financial education being a stay at home mom, but I like to try to give her the best info possible. This was a specific instance of that time.
She mentioned that she was heading into an Edward Jones investment rep this afternoon and wanted me to chime in with a few questions to help her make a good decision. 
Like I said, she is 55 with no retirement money aside from about 20k she cashed out of a universal life insurance policy she had out on my dad that was taking payments out of the equity it had built up.
That’s another conversation, but for this one, we’re focusing on how her conversation went.So the rep called me up and we had a conversation about what my mom had, and what she was doing now, and where she was headed. The first thing he mentioned was that “we need to start making your Mother’s money work for her NOW!” I obviously agreed and mentioned to him, “what funds do you recommend she get in?”
He came back with a handful of loaded mutual funds and I just stopped him in the middle of it and ask him why he wanted to put my mother in loaded funds. He actually was very up front about why. He said, “Clearly because that is how I make my money.”
I agreed and proceeded to tell him that we weren’t interested in his services and thanks for his time. He proceeded to tell me how “scary” and “difficult” and “dangerous” it was to be investing on your own. He said, “There are a lot of pitfalls along the way. Wouldn’t it be nice if you had someone to help you?”
I responded, “Yes, that would be nice to have someone that would warn me about financial advisors like yourself.”
That stopped him in his tracks and my mother took off.
New to the blog? Asking yourself, “what are loaded mutual funds exactly Hank?”
When I say “loaded mutual fund,” I mean a mutual fund that carries a sales load. A sales load is a mutual fund commission paid to brokers like this Edward Jones rep for selling you something you don’t need their help in buying. Sales loads do not benefit you, they benefit, and ONLY benefit the person selling them to you, much like an insurance policy.
Load fees typically range from four to eight percent and the way they are paid varies:
1. Front-end load (usually class A shares) – you pay the sales fee up front to the helpful broker.
2. Back-end load or deferred load (usually class B shares) – you pay the sales fee on your way out to your helpful broker.
3. Constant load fund (usually class C shares) – you pay the sales fees every year and might even have to pay a full load when you sell to the fine person selling you this.
Well Hank, I really like paying extra money for things I can do for myself (joking) what else is it costing me?
Well, think of it this way. By purchasing a loaded fund, you’re starting two steps behind. Let’s use simple numbers, say you bought a loaded fund with $10,000 that carried a 5% front end load. Well, as soon as you sign on the dotted line, you’ve just lost $500, so you’re starting with $9,500.
Think of the same guy that has the entire $10,000 to run on – who is going to be ahead in 1 year? 2 years? You can’t catch up because you’re starting behind. Think of it like an oval race track. If you are both running in the same lane, you are starting 5% of the way behind them, and will likely not catch up.
But Hank, they broker told me that these funds were spectacular and that I should make more from them than a no-load fund. Isn’t that worth it?
If a broker really did tell that to you; you are in a bad situation. Turn and run immediately. Do not pass go, do not collect $200. I can almost guarantee if you give me a loaded mutual fund ticker symbol, I can find a very similar NO-load fund out of the 12,000+ funds out there.
Feel free to contact me if you don’t believe me; I’ll find one for you. How many different ways can a sales guy scare you into buying the fund? Anyone else have some wise lines brokers have used to get you in their grasps and in to your pockets? I think if I wouldn’t have figured it out on my own, I’d still be playing Poker to take care of my retirement. 
Photo by: Snap@
Filed Under: Compensation • Insurance • Investing • Mutual Funds • ROTH IRA • Readers Requests • Retirement • Taxes • advice • financial education
There may be a few funds out there that justify the cost but I agree, there’s so many funds out there now that a person can find something without a load! I wouldn’t be surprised if those funds they were trying to sell you also had a high management fee!
[...] Edward Jones rep for selling you something you dont need their help in buying…. source: Should I buy a loaded mutual fund?, Some Rights [...]
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I’ve been learning the hard way. I had about 500K after sale of a home and from a rollover IRA. I made the mistake of going to Merrill Lynch (but it could have been any broker), who purchased all class C share mutual funds, and told me how great it was since I paid no commissions. What I didn’t understand (and I fully blame myself for not being educated) was the 12b-1 fees that contribute enormously to the expense ratio. The guy actually did lie to me when he said that the highest expense ratio of all the funds was 1.8%. Well, that’s bad enough, but what I found out was that didn’t include the 12b-1. He didn’t tell me about those. Bottom line, that 1.8% fund was really costing me 2.75%, and that’s year after year for as long as I own it. What a rip off. An Edward Jones broker warned me, but then they want to hit you up front with an A share load, which at my investment amount was 2.5%. So now my redemption period has ended on the funds, I’m better educated and still trying to learn, and I’m going to dump the C shares. I think you did the perfect thing for your Mom. Loaded funds of any type are not worth the extra cost. Fidelity, Vanguard, Schwab – they all have great no-load funds and are happy to help.
@FFB – Yea, I’d just stay away from them in general – there are plenty good ones out there already to choose from.
@Bill – Sorry you had to learn the hard way, it’s sad that many of us have to learn that way, but the key piece is that you DID learn! A, B, or C shares are funds that I don’t and WON’T be in anymore. The person SELLING you these shares has THEIR best interest in mine, not yours!
Thanks for stopping by!
I work in the finanical services industry and sell both no load and mutual funds with loads. I would only justify selling somebody a C share if the time horizon was 5 years or less though. If your in longer than any A share will outperform the C share given the same investment. The thing that disturbs me about the recent posts to this is that you don’t seem to realize that most no load funds are only index funds and because they buy and hold an index of stock they are not truly actively managed. This also means that the expenses are lower because their is very little portfolio turnover if any. Loaded funds have higher expenses because their distributed exclusively through traditional sales methods, and because the team of portfolio managers spends alot of time managing the portfolio for the best return. So in summary to state that you will only buy index funds means that you don’t want to pay for the relationship and the active management of the fund. The best performing mutual funds over the course of history are loaded funds because they actually have an investment team making critical decisions about the fund on a daily basis instead of just an buying an index and hoping the overall market is up. Index funds are great for diverification of risk and lowering expenses at the same time but most mutual fund returns are eroded by TAXES not by sales loads.
[...] my Mother got harassed about her investment decisions from a financial advisor and nearly dumped in …, I had to step in and say something. The point was that she could keep that person on the hook and [...]
All I can tell you is look at the rate of return, on average, of your loaded funds vs. your “no-load” funds. Not to meantion that “no-load” funds still have their fees and a lot of times end up being more expensive over a long term. The key is to know your time horizon for your investment. This will help you make the best choice. Also, if financial advisors didn’t get paid for the work they do, where in the world would you find any. There is a reason we study what we do and take the exams we do and continue with our education on the market as well as other financial products, this is one reason we get paid. If the advisor is only registered with one mutual fund, that is when you worry, otherwise, I would highly suggest it, unless you have the time and discipline to educate yourself on each one of the 10,000 mutual funds that are available to you. Good luck to everyone in their investment choices and I wish you all great success.
In July my husband and I took our accounts and moved them to Edward Jones. Now that I have had the time to do more research and have seen what it cost us I wish I had waited and done nothing, especially since the market starting crashing right after we got it. I feel trapped now because we paid 3.5% on everything up front. Isn’t it best just to stay now that we have already paid all the fees. He said after the initial start up cost there would be no fees. Am I right in believing this or am I in for more bad news. Due to the markets and the loaded funds we have lost $25,000 probably. HELP!
Thank you for anybody that can help.
Wow. You really have no idea what you’re talking about. Listen up everyone, Don’t listen to this joker. No load funds may look like a good deal, until you look at the annual fees associated with “no load funds”. Let’s look at American Funds, Growth Fund of America. Class A shares maintenance fee = .62% annual. Class C shares maintenance fee = 1.41%. And American Funds are probably the cheapest funds you’ll find in the real of 4-5 star rated funds.
Class C shares have a 1 year deffered sales charge, meaning you pay no load providing you hold the shares for at least 1 year.
Class C shares are generally a good idea if your account balance is less than $25,000. That way, you pay no up front sales charge, and the 1.41% annual maintenace fee won’t bite your account to bad. When you get to $25,000 though, you start to get “breakpoints” or discounts on the Class A shares. These discounts, combined with the MUCH lower annual fees associated with the A shares will greatly benefit your bottom line.
There are plenty of good brokers out there that really want to help you make money, find one. Don’t listen to this amateur.
BTW, you may have felt so very smarmy and superior when you shut down that bad broker, who was an idiot for not having the knowledge to put you in your place, but you aren’t doing your mom any favors by painting loaded funds with your wide and ignorant brush.
Go to school and get your series 7 if you really want to help people.
Oh, and Thomas, who allegedly works in the “financial services industry”. Would that industry by “Check-n-Go”? Because you know exactly f**k all about mutual funds (which puts you in good company here I suppose). Class C,B and A shares perform almost identically, and there is NO difference in how they are marketed or managed.
God save us from the ignorant.
Mutual funds are a bit scammy because of the way brokers earn commission. In Australia most mutual funds won’t let you go direct so you have to deal through a broker (more reason to put your money elsewhere I say)