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Advantages of Loaded Funds?

 
 
Jay
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      01-06-2004, 09:45 PM
I am pretty sure that most people here favor no-load funds (for know
reasons). But, since the loaded ones still exist (class A,B,C etc.) there
has to be some advantages (apart from commissions to the Financial Advisors
and party). Any insight?

 
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John A. Weeks III
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      01-06-2004, 10:49 PM
In article <rWFKb.4602$>, Jay
<> wrote:

> I am pretty sure that most people here favor no-load funds (for know
> reasons). But, since the loaded ones still exist (class A,B,C etc.) there
> has to be some advantages (apart from commissions to the Financial Advisors
> and party). Any insight?


Yes...it is highly advantageous to those who are selling the loaded
funds. They push them like used car salesmen push used taxi cabs.\
There is no big commission for selling no-load funds, so nobody is
out there doing the high pressure sale for no-load funds.

A second reason is many folks are caught in a captive situation,
such as a 401K plan that only offers loaded funds. In this case,
they really don't have a choice (other than to change jobs, something
that is relatively difficult given the economic downturn we are in).

Some folks think that actively managed funds with high fees must
do better than lower cost fees. Studies have not found that high
loads mean better returns, in fact, just the opposite is often true.

-john-

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John A. Weeks III 952-432-2708
Newave Communications http://www.johnweeks.com
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Brent D. Gardner, ChFC
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      01-06-2004, 11:10 PM
"Jay" <> wrote in message
news:rWFKb.4602$ ...
> I am pretty sure that most people here favor no-load funds (for know
> reasons). But, since the loaded ones still exist (class A,B,C etc.) there
> has to be some advantages (apart from commissions to the Financial

Advisors
> and party). Any insight?


"Somebody has to pay someone, something, someday." - Burt Meisel, CLU

There Ain't No Such Thing As A Free Lunch (TANSTAAFL).

I sold mutual funds with sales charges for a decade. I switched to fees for
the investment business, but not because I think sales charges are bad. Far
from that, I think they are an effective compensation system for accounts
with less than $1 million, especially for accounts with less than $250,000.
For accounts less than $100,000, in middle to lower income markets, where
fees aren't generally going to be deductible, they make a lot of sense when
help or advice is needed (and there remains a near total lack of available
fee-based advice in this market). Sales charges compensate the distributor
for doing their job, whether that is creating demand where there is none,
educating investors who need it, and, perhaps, but not always, some
financial planning, that is incidental to the sale of the fund.

For investors with more than $500,000, but less than $1,000,000, its six on
one side, half-dozen on the other. Above $1,000,000, fee-based advice wins
hands down, where service is going to be an ongoing requirement. Why? No
sales charges on purchases of $1,000,000, or when aggregate purchases reach
that level. A 25 basis point trail is too small to be profitable (there
aren't any reputable firms that charge anywhere near that low), so fees make
a lot more sense at this level.

Remember, more than HALF of mutual fund assets are distributed via
Registered Representatives (RR) through the Broker/Dealer (B/D) channel.
Imagine what would happen to the stock market if these RRs didn't create
demand? The market would head South, guaranteed. People don't automatically
invest in the stock market. As a rule, they never have.

FWIW, I still use many of the same fund families, just different share
classes. The difference between sales charges and fees, at the most
fundamental level, is that I determine what I want to charge, while sales
charges are dictated by the fund (and limited by the law).

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.

 
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Michael T Wing CPA
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      01-06-2004, 11:20 PM
Jay <> wrote:

> I am pretty sure that most people here favor no-load funds
> (for know reasons). But, since the loaded ones still exist
> (class A,B,C etc.) there has to be some advantages (apart from
> commissions to the Financial Advisors and party). Any insight?


There could be an advantage in that the load discourages rapid
turnover or trading of fund shares. Some of the ramifications of
this are:

1) The fund saves costs by way of less trading to raise cash to
payoff departing shareholders.

2) A "spendthrift" investor might be more inclined to stick with
the fund long term, so as not to "lose" the load, and thereby
might ultimately benefit.

Whether these benefits out weigh the costs when compared to
no-load funds is, of course, a matter of speculation, conjecture
and debate. I'll just say that I am willing to keep an open mind
on the issue, especially when the second item mentioned above
applies.

MTW


 
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John A. Weeks III
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      01-07-2004, 01:01 AM
> There could be an advantage in that the load discourages rapid
> turnover or trading of fund shares. Some of the ramifications of
> this are:


I just got a notice from AIM that they are limiting trades in
and out of fund to some small number of times per year. This
was done with a rule change in the fund. Based on this, I'd say
that having a load may discourage trading, but it isn't the only
way of doing it.

> 2) A "spendthrift" investor might be more inclined to stick with
> the fund long term, so as not to "lose" the load, and thereby
> might ultimately benefit.


But this might also have the opposite effect, and keep someone
in a fund that is tanking long after they should have left.

-john-

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John A. Weeks III 952-432-2708
Newave Communications http://www.johnweeks.com
================================================== ==================

 
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Gene E. Utterback, EA
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      01-07-2004, 06:19 PM
"Jay" <> wrote in message
news:rWFKb.4602$ ...
> I am pretty sure that most people here favor no-load funds (for know
> reasons). But, since the loaded ones still exist (class A,B,C etc.) there
> has to be some advantages (apart from commissions to the Financial

Advisors
> and party). Any insight?
>


If you look closely you will see that for most fund groups the loaded funds
have lower expenses that they no load funds. In some cases, depending on
how long you hold the Mutual Fund, in can be cheaper in the long run to
actually pay a load up front and avoid fees and expenses in the future.

There are arguments that you will have less of your money working for you up
front, but lower fees can actually result in improved growth of your
investment. Again, it depends on how long you hold the investment. In my
analysis I've seen that the break even point is somewhere near year 3. From
year 1 through 3 you make out better with a no load fund, but after year 3
your account value should be higher with the A share.

Gene E. Utterback, EA


 
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BreadWithSpam@fractious.net
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      01-07-2004, 06:54 PM
"Gene E. Utterback, EA" <> writes:

> If you look closely you will see that for most fund groups the loaded funds
> have lower expenses that they no load funds. In some cases, depending on
> how long you hold the Mutual Fund, in can be cheaper in the long run to
> actually pay a load up front and avoid fees and expenses in the future.


Any hint of documentation of that claim?

Unless you are conflating class 'B' shares with no-load, in which
case, it might appear to be true, your assertion, as far as I know,
is completely false.

> year 1 through 3 you make out better with a no load fund, but after year 3
> your account value should be higher with the A share.


A share, B share, C share - all are _loaded_ shares, in general.

True no-loads versus any of the loaded funds - that's the real
question. As far as I know, outside of the loads themselves,
expense ratios are quite similar. Some more, some less.

The question the OP needs to ask is not "what are the advantages"
but, rather, "what does one buy?"

The load is _not_ a management fee or fund expense. It's a
_sales_ fee and it's normally used to compensate the person
who took the time to sell the person the fund. This is not
necessarily a bad thing - as another poster so frequently
points out to us, most folks need to be sold certain investments,
else they'd not invest at all. If the load buys one the advice
and the useful input of the person who sells one the fund,
that load might very well be worth it and then some.

For self-motivated folks willing to do their own research
and fund selection, the load buys nothing whatsoever. Not
all of us, not even necessarily the majority of us, fall
into this category however.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
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PaulMaf
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      01-07-2004, 08:02 PM
>From: "Gene E. Utterback, EA"
>Date: 1/7/04 10:19 AM Pacific Standard Time
>Message-id: <bthig3$7chg1$>


>If you look closely you will see that for most fund groups the loaded funds
>have lower expenses that they no load funds.


Not true. And neither is it true that most no-loads hacve lower expenses.

> In some cases, depending on
>how long you hold the Mutual Fund, in can be cheaper in the long run to
>actually pay a load up front and avoid fees and expenses in the future.>


Compaed to what? The statement is only true when compared to other loaded funds
who impose the loads via back ends loads or ongoing higher expenses via 12B1
fees.

>There are arguments that you will have less of your money working for you up
>front, but lower fees can actually result in improved growth of your
>investment.


The only thing that can improve the growth of one's investments is higher
returns. And, as a group, loaded funds do not outperform no-loads and vice
versa.

> Again, it depends on how long you hold the investment.


Nonsense!

> In my
>analysis I've seen that the break even point is somewhere near year 3. From
>year 1 through 3 you make out better with a no load fund, but after year 3
>your account value should be higher with the A share.>


Nonsense! An A share is only one type of loaded fund. B,C, D and all the other
alphabet type of shares are loaded funds also.

Your analysis would only hold true as a class description if you are calling
all those other alphabet shares no-loads. But that is FALSE!

 
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John A. Weeks III
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      01-07-2004, 08:04 PM
In article <bthig3$7chg1$>, Gene E.
Utterback, EA <> wrote:

> "Jay" <> wrote in message
> news:rWFKb.4602$ ...
> > I am pretty sure that most people here favor no-load funds (for know
> > reasons). But, since the loaded ones still exist (class A,B,C etc.) there
> > has to be some advantages (apart from commissions to the Financial

> Advisors
> > and party). Any insight?
> >

>
> If you look closely you will see that for most fund groups the loaded funds
> have lower expenses that they no load funds. In some cases, depending on
> how long you hold the Mutual Fund, in can be cheaper in the long run to
> actually pay a load up front and avoid fees and expenses in the future.


It is true that total expenses of a fund is very important to look
at. It is also true that some loaded funds have lower annual costs
than some similar no-load funds. In fact, there are some no-load
funds that have such high fees as to be in the scam category.

But, for any loaded fund that you find, I can show you an equivalent
no-load fund that will have lower annual costs. There are so many of
each type of fund that no one has any part of the market cornered.

-john-

--
================================================== ==================
John A. Weeks III 952-432-2708
Newave Communications http://www.johnweeks.com
================================================== ==================

 
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Gene E. Utterback, EA
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      01-08-2004, 05:21 PM
"John A. Weeks III" <> wrote in message
news:070120041404202618%...
> In article <bthig3$7chg1$>, Gene E.
> Utterback, EA <> wrote:
>
> > "Jay" <> wrote in message
> > news:rWFKb.4602$ ...
> > > I am pretty sure that most people here favor no-load funds (for know
> > > reasons). But, since the loaded ones still exist (class A,B,C etc.)

there
> > > has to be some advantages (apart from commissions to the Financial

> > Advisors
> > > and party). Any insight?
> > >

> >
> > If you look closely you will see that for most fund groups the loaded

funds
> > have lower expenses that they no load funds. In some cases, depending

on
> > how long you hold the Mutual Fund, in can be cheaper in the long run to
> > actually pay a load up front and avoid fees and expenses in the future.

>
> It is true that total expenses of a fund is very important to look
> at. It is also true that some loaded funds have lower annual costs
> than some similar no-load funds. In fact, there are some no-load
> funds that have such high fees as to be in the scam category.
>
> But, for any loaded fund that you find, I can show you an equivalent
> no-load fund that will have lower annual costs. There are so many of
> each type of fund that no one has any part of the market cornered.
>
> -john-
>
> --
> ================================================== ==================
> John A. Weeks III 952-432-2708
> Newave Communications http://www.johnweeks.com
> ================================================== ==================
>


OK - I will admit that I did NOT communicate my point very well. I am
usually a pretty decent communicator, but this time I failed. Let me try to
elaborate on what I MEANT to say.

I do agree that there are so many funds of each type that no one has any
part of the market cornered. I also believe that professionals will always
understand the differences and nuances, but that many "self-help" investors
do not, though there are some that clearly have the time, education, and
inclination to do it themselves. And I must admit that when I said
"no-load" I should have said "C share".

That being said, here is what I've found - and please keep in mind that this
is a generality that I've notice, I do understand that there are exceptions
and I also recognize that my findings are limited to my experience and
exposure. My comments and examples are not intended to endorse or disparage
any particular product, there are merely examples that I've noted.

Advantus Cornerstone Fund has an A share and a C share. They compare as
follows:

A Share - Total Expense Ratio = 1.24% - 12b1 Fee = 0.25% - Max Front Load =
5.5%

C Share - Total Expense Ratio = 1.99% - 12b1 Fee = 1.00% - No Front or
Deferred Load

Assume an investment of $50K with NO GROWTH. I know this won't happen, keep
in mind this is just a simplification for the illustration. As long as both
Share classes perform the same, it shouldn't matter.

The first year, the A share load is $$2750 and the fees are $704.03, leaving
$46,545.98 in the fund.

The first year, the C share has no load and the fees are $1,495.00, leaving
$48,505.00 in the fund. So far, the C share is ahead.

In years 2, 3, & 4, the A Share has fees of $693.54, 683.20, & 673.02 and a
remaining balance of $44,496.22.

In years 2, 3, & 4, the C share has fees of $1,450.30, $1,406.94, &
$1,364.87 and a remaining balance of $44,282.90. At this point, there is
more money remaining in the A share holding than the C share holding.

After 15 years the A share has an ending balance of $37,723.03 while the C
share's ending balance is $31,711.56, the A share total fees and costs are
$12,276.97 while the C share total fees and costs are $18,288.44. The C
share cost $6,011.48 more than the A share over 15 years.

I've built an Excel spreadsheet where the fund load, expense ratio, 12b1
fees, and initial investment are input for an A share and a C share and
virtually every time I run this analysis I get a similar result - it costs
less (and you have more the end) with MOST A shares than with C shares. Of
course, I haven't run every single available fund. But I have picked funds
at random and funds my friends bought and funds that seem to be "hot" and
I've yet to find one where the C share wins. I'm sure there are some that I
just haven't found.

More importantly though, at least in my thinking, is that this underscores
the importance of using a professional for most investors who don't have the
time, education and inclination to do all the research themselves. The song
I hear the most is "you don't need an advisor, just find a nice no load
(which I'm equating to a C share) and buy it yourself - don't pay a
commission to buy an investment."

The problem here is twofold, first - the C share may not be cheaper in the
long run; second - how does one find a "nice" fund considering there are so
many of each type of fund that no one has any part of the market cornered?

Of course, I could be all wet on my thinking and analysis. Maybe I'm
missing something here, if so I would appreciate the pros here pointing it
out to me.

Gene E. Utterback, EA


 
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