Demise of the no-load council points to a load of new concerns

Your Funds

Dollars & Sense

June 04, 2000|By CHARLES JAFFE

A few weeks ago, without fanfare or news coverage, a trade group called the 100% No-Load Mutual Fund Council disbanded.

While most investors never heard of the organization, its demise is the surest sign ever that the "load vs. no-load" debate is dead and that the fund business has moved on.

If only consumers could do the same.

The 100% No-Load Mutual Fund Council, in recent years, had dwindled to a diehard few small fund firms that vehemently disavowed sales charges. It had splintered from a group that became the Mutual Fund Education Alliance, as the bigger organization's focus evolved from investing directly and without sales charges to investing smartly and with an eye toward costs.

The difference might seem subtle, but it's not.

Today, many big no-load fund families have entire lines of funds carrying sales charges (such as Janus with its IDEX funds), and many traditional load companies have acquired or built a lineup of no-load funds.

What's more, load funds waive sales charges in certain circumstances, such as when they are part of a mutual fund supermarket that caters to financial advisers or when they are included in a retirement plan.

In short, fund firms want market share and investable assets and will work under any and all sales structures to get it.

Just in the weeks since the no-load council folded, I have a bundle of mail from people searching for financial advisers who would put them only into no-load funds, from folks interested in variable annuities that invest only in no-load funds, and from people who claim very little knowledge of investing but want a tip on the best available no-load fund. (I don't pick investments or advisers for readers, by the way.)

In each case, they put the emphasis on no-load funds.

But investing through an adviser means paying for services rendered; while not the exact same thing as a load, it has the same effect, reducing assets in order to pay for the guidance it took to pick a fund or build a portfolio.

Likewise, the annuity almost certainly carries sales charges that the investor pays, regardless of the funds bought; what's more, load funds often waive sales charges within annuity accounts, becoming de facto no-load funds.

The people who know very little might not want to pay a load, but either they need to educate themselves or they need the financial guidance associated with load funds. Worse yet, these investors - and countless others like them - equated "no-load" with "superior performance."

That's wrong; there are no studies to support the conclusion that one payment system consistently delivers better results than the other. Looking at the top of the long-term leaders board - where you find a mix of load and no-load funds - bears this out.

Without question, sales charges are a drag on performance, but no more so than high expenses. That's why no-load funds do not dominate the leader boards.

Other forms of sales charges - wrap fees and asset-management fees paid to advisers who manage money in no-load funds - also cut into absolute performance (though if the adviser picks better funds and allocates your money in ways you would not have done on your own, he has earned his keep).

The no-load council's demise is proof that the industry has focused on other issues. So should you, and when it comes to funds and sales charges, those concerns should be:

Help vs. no-help. Several studies have shown that load funds, on average, are likely to provide the same returns as no-load funds during any given time period. That means your choice comes down to "do-it-yourself" or "hire-some-help." If you don't need help, there's little reason to ever pay a sales charge; if you need assistance, however, you will have to pay for it somehow.

It might not be called a load, but guidance - from buying a newsletter or online service to paying the full freight with an adviser - always comes at a cost. Worry less about the form that payment takes and more about whether you get your money's worth.

The cost of ownership. No-load doesn't always mean cheap. There are plenty of funds that don't levy a sales charge but rip off investors in the area of expense ratios. Conversely, some loaded funds carry low costs; even after paying the sales charge, they can be cheaper to own than many no-load funds if held long enough. Examine the prospectus to see what you pay to own the fund.

Charles A. Jaffe can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass., 02107-2378.

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