The Load vs. No-Load Debate

The ongoing comparisons between load and no-load funds have continued unabated since the latter form of mutual fund first appeared in the early seventies. Both sides seem to be able to produce irresistible arguments as to why their type of fund is the only right choice, but some cracks have appeared under both platforms over time.

A closer look shows that some of the underlying tenets that both arguments use are based on factors that no longer apply the way they once did.

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What is a Load Fund?

As any experienced fund investor knows, load funds carry a sales charge in addition to their annual expenses and management fees that is charged either at the time of purchase (for A shares) or redemption (for B shares), or both (for C shares). This fee is then typically divided up between three parties: the fund company, the broker/dealer, and the broker who actually sold the fund to the client. The fund company typically receives the fractional percentage of the sales charge, such as the 0.75% of a 4.75% or 5.75% sales charge), while the dealer is paid the rest, and then in turn passes on a portion of the commission to the broker according to the commission schedule that dictates how this person is paid.

Of course, no-load funds do not assess this fee, and those who sell them receive no commission of any kind (although they may be financially incentivized in other less direct ways). Mutual fund companies that charge sales loads include Davis, American, Franklin-Templeton, MFS, AIM, Putnam and Pioneer Funds. The top no load mutual fund companies include Vanguard, Fidelity, Janus and American Century.

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A Changing Market

Although the debate between funds that assess additional sales charges and those that don’t can seem every bit as relevant today as it was 20 years ago, the mutual fund markets have matured in many segments that have combined to make this issue at least somewhat obsolete. From the time that no-load funds were incepted through the 1990s, most load funds were sold exclusively by stockbrokers, financial planners and insurance salespersons who worked either partially or completely on commission.

No-load funds were conversely marketed directly and solely by the fund companies themselves to do-it-yourself investors who wished to avoid paying sales charges. But comparisons between the two types of funds had at least one problem at the outset. While no-load proponents usually listed the maximum sales charge assessed by a fund in their arguments, this charge would decrease according to the breakpoint schedule of the fund, and in most cases would completely disappear with any purchase within a single fund family of a million dollars or more. At that point, the fee schedule for load funds became materially identical to their no-load competition (although this factor was of course not terribly relevant for lower-income and net worth fund investors).

But the following decades brought major changes to the platforms and methods of compensation of financial advisors and salespersons that have largely eroded these boundaries. Most major no-load firms now offer platforms through which full-commission brokers can sell their products, and many load fund families have created no or low-load versions of their shares for distribution through traditional no-load channels. The explosion of variable annuity and life insurance products has provided an additional common ground where both types of funds can be used without load distinction, as the mutual fund subaccounts that are used inside these products never charge separate sales loads of any kind and are structured identically inside their respective contracts or policies.

Registered Investment Advisors have also grown tremendously in popularity in the last 20 years, and most RIAs today use platforms that allow them to set their own fee for their money management services and use either type of fund interchangeably in their portfolios without regard to sales charges.

These factors have combined to make it more difficult for analysts to accurately gauge the actual performance of unadorned load and no-load funds over recent periods of time. Previous studies by Morningstar and other sources from the 1990s seemed to indicate that the performance of no-load funds was not as affected by sales of shares during market downturns as the load fund progenitors claimed, and also that the additional fees and charges that come with load funds did not affect long-term performance to the degree that was cited by the no-load camp.

In fact, most studies that have been conducted comparing the two types of funds have concluded that neither type of fund has materially outperformed the other. Needless to say, both camps latched onto this finding to further justify their points of view, with the no-loaders trumpeting that there was therefore no additional value to be had by purchasing load funds, and the load funders responding that investors had nothing to lose by purchasing load funds, which often had considerably longer track records.

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The Service Factor

One of the wildcard variables that must inevitably be addressed in the debate between load and no-load funds is the individualized service that is often provided by those who are paid a commission for selling load funds to their clients. Those who pay these fees are often rewarded with additional services such as stock tips, general financial education or preferential treatment for the availability of certain types of investments such as IPOs.

But this type of service is impossible to incorporate into any type of study, because the volume and quantity of service provided by each broker will vary according to both their levels of competency and experience and their operating budgets.

The Bottom Line

Many financial planners and analysts now feel that the load vs. no-load debate has become largely obsolete in the face of recent changes in the industry. Current trends seem to be making the distinction between these two types of funds increasingly blurred, and a time may come when the average investor is no longer familiar with this distinction.

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