Fees, funds and the prudent path to wealth

Staying Ahead

July 08, 1996|By Jane Bryant Quinn

NEW YORK -- One sure sign that the public loves no-load mutual funds is that even stockbrokers want to sell them. Smith Barney -- a Wall Street firm with a major mutual fund business -- has just announced a new no-load program opening in mid-July. Other firms are expected to head in a similar direction. Even without big brokers on board, no-loads have captured almost 44 percent of the market, according to the Investment Company Institute in Washington.

But investors also want more advice about the no-load funds they buy. One sure sign of that: the Vanguard Group in Valley Forge, Pa. -- the quintessential do-it-yourself mutual fund company -- has started a personal financial planning service.

These trends will slowly come together: more advice from the no-load mutual fund groups and more interest among brokers in finding profitable ways of selling no-load funds.

Normally, stockbrokers turn up their noses at true no-load funds because they generate no sales commissions. Funds can also charge you a 12b-1 fee, which is used to compensate brokers. But, thanks to a rule written by the Securities and Exchange Commission, a no-load's 12b-1 fee can't exceed 0.25 percent a year, and that doesn't raise enough money to motivate salespeople. Many no-load funds charge no 12b-1 at all.

Most brokers today sell "load" mutual funds, charging clients in one of two ways. You can pay a sales commission upfront, usually 4 percent to 5 percent, plus a modest 12b-1 each year. Or you can duck the upfront commission, and instead pay a larger 12b-1 plus an exit fee for selling the fund before five to seven years have passed. (If you'll hold your fund for many years, it's usually cheaper to pay upfront.)

But Smith Barney's new program, encompassing 28 no-load mutual fund families, will compensate salespeople in a different way. Instead of paying a 12b-1 or a sales commission, clients will be charged up to 1.5 percent of their assets annually (the fee is computed and charged every quarter). On a $50,000 portfolio -- Smith Barney's minimum -- that comes to $750 a year.

Penny-pinchers can buy no-loads directly from the mutual fund company itself. For a fund's toll-free number, call the information operator at 1 (800) 555-1212. Direct buyers still pay the 12b-1 fee, if the fund has one. But you avoid the hefty 1.5 percent brokerage-house charge.

Paying 1.5 percent doesn't sound too terrible when Standard & Poor's 500-stock average rises 37 percent, as it did last year. But if stocks rise only 8 percent, you'd be giving up nearly 20 percent of your capital gain. On a bond fund that rises 6 percent, Smith Barney's fee swallows 25 percent of your gain.

If stocks rise 12 percent annually over the next 10 years, and you start with a $50,000 investment, a 1.5 percent fee reduces your total gain by $19,588, says Brian Mattes of Vanguard, whose no-load funds aren't part of the new Smith Barney program.

You can also buy no-loads through a fee-only financial planner. These planners accept no sales commissions but levy a charge for investment advice -- typically, around 1 percent a year. For this service, planners usually require minimum accounts of $50,000 to $100,000. On the $50,000, 10-year investment described above, a 1 percent fee would cost you a cumulative $13,321.

So why would you pay a fee to buy no-loads when you can buy them directly for no charge at all? The selling point is investment advice. Brokers and planners help you select the funds to buy, give you quarterly performance reports, advise you on when to make a change and -- just as important -- encourage you to stick with your plan when your gut is screaming "cut and run."

Vanguard performs this advisory service for only those with accounts of $500,000 or more. The annual fee: 0.5 percent a year for all-Vanguard portfolios and 0.65 percent if you include other companies' funds. For a "poor man's" $500, Vanguard will give you one-time advice about how to structure your current investment portfolio.

One warning: Advisory services match your investments to your goals and suggest a specific asset allocation -- a certain percentage of money in stocks, another percentage in bonds. But they make that judgment based entirely on the investments you tell them about.

Pub Date: 7/08/96

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