Unless you have knowledge and experience in building equity–whether that be through the stock market, real estate, or growing a business–your options are typically down to mutual funds or segregated funds. Here’s a little tip to get the most out of them.
It’s A Big Load Of Loads
You pay fees on mutual funds. That’s probably the biggest selling point to the casual investor. They couldn’t care less who the fund manager is or what the fund is invested in. The fees should more accurately be referred to as expenses. Some aren’t avoidable and some are. Let’s get the main, unavoidable one out of the way. That’s the management fee. It’s the amount of money you pay the fund company for doing the work. But most people don’t know about the expenses on top of that. And that’s the expense of the person that sold it to you. They charge you what’s known as a load. This is where you can potentially save yourself some money.
A load is essentially a commission. It’s the amount of money that’s being paid to the broker or advisor on top of their trailers. Their trailer is the recurring money that the fund company pays them to keep their clients’ money with that company. Loads typically come in four forms or some combination thereof. I’m going to focus on the two most relevant and common to the casual investor. The thing that’s interesting (and annoying) to the investor is that the broker or advisor can choose how the load is structured. So, let’s take a look at the different loads and see how you can leverage this knowledge.
A front end load is an amount of money that is paid to the broker up front. If you put in $1000 and the front-end load charge is 5%, then the actual amount you put into your portfolio is $950. It’s basically the fee he charges you for doing the work on your behalf. The key thing to note here is that this load is negotiable. The percent is what the broker or advisor thinks his time is worth. The bigger the book of clients the advisor has, the higher this charge usually is. Remembering that the charge is negotiable, it can actually be as low as 0%.
The back end load is a deferred sales charge. Instead of being paid to the broker or advisor, it’s paid to the fund company. It’s money that you pay when you sell your fund units. If you have $100k in your portfolio and you want to take out $50k, you would pay the sales charge at that time. This charge can be as high as 6%. In the case of taking out $50k, a 6% back-end load would cost you $3,000.
Typically, the percentage declines with time. Every year, they might take off 1%. So if it was 6% in the beginning, then your charge would be 0% six years later. It’s basically the fund company’s way of saying that they want your money for a long time. Interestingly, a fund with a back-end load will usually have the fund company paying a higher up-front commission to the advisor compared to a fund with a front-end load. This is to thank the advisor for putting your money into a more locked-in fund. By contrast, a front-end load results in no up-front commission to the advisor, but he will earn higher trailers.
Let’s Put This All Together
With a front end load, you can pay 0% load no matter what. With a back end load, you can potentially pay a fee of up to 6% for early withdrawal in the first six or seven years. Do the math.
Your broker or advisor might tell you how it’s more advantageous for you to have your money in a back-end load, because you don’t need the money right away. Does it really matter when you need the money? What if there was an emergency. Wouldn’t you feel better knowing you could take that money out, without having 6% taken off the top?
And what if he’s charging you a front-end load of 5%? What then? Unless this guy is so busy that he can’t meet with you otherwise, there’s no reason he should be charging you a front end load except for greed.
Do yourself a favor and ask whoever sold your funds about the type of fee structure your money is in. And make sure you get that changed to a front-end load, negotiated down to 0%.