My wife has a Simple LE-IRA (I thought it was a 401K, still don't know know the difference). We are meeting with her Smith Barney rep on Fri 4/13. Currently she is investing $400.00 per month and her employer contributes 3% of her yearly salary to her IRA. She is 28 and doesn't plan on retiring for a long time. She doesn't have a problem investing aggressively. Currently she is investing a 3rd of all contributions into Legg Mason Partners Aggressive Growth FD CL A, a 3rd into Legg Mason Partners Fundamental Value FD CL A, and a 3rd into Legg Mason Cap & Inc FD CL A. According to her Smith Barney Rep there are around 20,000 funds she can choose from. Originally we were told to choose Legg Masons Funds but apparently there was a miscommunication. We feel there are better funds out there and would like some advice.
Also they are hitting here with a 5.7 % fee every time she invest is there a better option? We were thinking about just matching her bosses 3% and putting the rest into a Roth IRA.
well, since this post was directed towards me i guess i can speak my mind...
i'll start at the end and work my way backwards.
that high fee, known as the load, is disgusting and revolting. it simultaneously makes me sick and pissed off. sick because unknowing investors are being fleeced by so-called "advisors" and pissed off because "the system" as set up is designed to perpetuate these fees.
simply put, these fees help the advisor buy a bigger yacht, it's that straightforward. most advisors undergo rigorous training -- in sales techniques designed to get investors into front-end loaded funds ("class A" shares). it 's gravy for the fund company, and a new Lexus every year for the advisor.
someone is going to chime in here and explain that you get "better" fund management with a load fund. this is simply untrue. data from Morningstar, a company that tracks the mutual fund industry, shows that the typical load fund annually underperforms the typical no-load fund by at least 0.5% -- and that's on top of the load that was taken off the top [source: Bernstein, The Four Pillars of Investing, page 204]. so you lose money at the start, and then compared to the average fund you keep losing money every year.
in short, by paying a load you will get less return on your money. i can't make this any more clear. your advisor will, by waving his hands and using big words, try to convice you that paying an upfront load puts you at an advantage. it does not. it simply makes him money -- that's why he is trying to convince you that paying a load is a better way to go.
here is some data regarding the first two funds:
the last fund seems to be a Legg Mason "special" for Smith Barney, and is not listed by Morningstart (or at least i can't find it listed):
your wife is doing the right thing by investing in a tax-advanataged account. the more money that you guys can plow into this account, the better off you will be down the road. if you can find the right investment mix inside the IRA account, you will be well on your way.
the third fund above is a capital appreciation/income fund. this is probably too conservative for a 28 year old who wants to invest aggressively. moreover, the mix of funds is nearly 100% domestic and very large cap weighted. this does not provide her with the international exposure she'd want at her age nor does it offer any exposure to mid- and small-cap stocks. for these reasons i suggest a broader investment mix. see the links that i posted about 1/3rd of the way down the following thread:
costs matter. over the long run, fund performance will tend towards the market average. your return is the fund's gains minus the fees. you will therefore get the best performance from funds with low fees.
hence, i would ask your SB rep straight up: "i would like a printed list of available no-load funds with ER's (expense ratios) below 1%, including any available index funds".
you can tell a lot about the "advisor" by gauging his reaction to this simple question.
ps: stand your ground.
Depending on the house, another way an advisor may charge you is a annual fee of say .80 to 1.25% of assets for portfolios typically over $100M. These are called wrap accounts or managed accounts. What they do is bundle many institutional (high minimum) funds that typically would not be available to the average investor and don't charge any brokerage/transaction fees.
Under "rights of accumulation", you are charged less and less for A shares the more you have of that fund family, typically in increments of $25M. You are charged 5.7% sales loads? Really? And btw, although fees are a drag, not all load funds underperform indexes.
Advisors are not bad as ar-jedi might lead you to believe and I would not expect get free service from any professional, including an asset allocation.
in cases where one needs professional help, i would suggest a "fee-only" financial planner. you pay once, and only once, to receive objective advice and investment planning from someone who receives no other renumeration other than from you. he or she has no other financial interest besides providing you sound advice.
this type of investment counseling differs from advisors who continually "skim" off of your investment contributions via a load, or make money by charging an annual wrap account fee -- in these cases you just keep paying and paying and paying and paying and paying...
Smith Barney funds were aquired by Legg Mason and is now refered to as Legg Mason Partners funds...
Morningstar likes one of the fund manager's you are investing in...
From www.morningstar.com "10 of the Best Mutual Fund Managers Around"
As long as Richie gives me the same long term performance that he's known for, I can sleep at night.
You are correct in matching your company 3%, then put the rest in a ROTH. Pulling money out tax free for retirement is BIG. Ask you advisor about the new companies Legg Mason owns so you can benefit from their top-notch fund managers. (Western Asset, Clearbridge Advisors, Brandywine Global, Royce & Associates, Permal, BatteryMarch)
Capital & Income Fund is 40% Stocks/40%Bonds, and 20% either direction depending on how the manager sees fit.
If you have extra money and want to look else where, take No-LoadJEDI's advice and throw it in a no load fund. If you like your Smith Barney advisor then stick w/ him... if not, look elsewhere.
12b-1 fees.... yes you keep paying and paying and paying, but your investments keep paying and paying and paying for themself. (.25%)
Disclaimer: I work for a company that markets Legg Mason Partners, AIM, American Funds, Pioneer, Van Kampen, and Oppenheimer funds. I am sure there are more.
***An Investor should consider a fund's investment objectives, risks, charges and expenses carefully before investing. An investor should read the prospectus carefully before investing.
Ar-jedi, James, and Kansaskid thanks for taking the time to answer my post.
I wanted to clearify a few things.
My wife chose Smith Barney because its an employer sponsored plan so she doesn't have a choice especially if she wants the three percent from her boss.
I wanted some opinions because her rep is on shakey ground with me already and I wanted to be prepared when we have the meeting on Friday. Let me explain. When my wife opened this account about 24 months ago. When she first opened it she was advised by her rep to invest aggresively because she is young. Obviously sound advice. He told her that he would invest the money in aggressive mutual funds. Fast foward to 8 months ago when I was reviewing her IRA. I saw all her money was being placed into a Bank Deposit Program. So her money sat in this Bank Deposit Program for 16 months earning about 1%-1.47% intrest. Of course shame on me and her for not reviewing the paper work earlier. My wife unfortunately doesn't understand any of this and would rather I handle it. So I am questioning whether he had her intrest in mind when she started investing. I don't have a problem paying for a service, but what service is he providing for that 5.7% fee. He never called her over those 16 monthes to advise her she needed to do something else. When she told him to invest in the current mutual funds she had now he only said ok. Never advised her on better options or anything. It wasn't until yesterday when I made my wife call him and set up the meeting that he said there are more options available. Obviously there are some things we need to clear up on Friday.
Again thanks your advice. I just wanted to be a little prepared for the meeting.
Thanks again. I'll let you know how it turns out.
WTF? This is definately a problem if the SB guy did not direct the money like he advised. It sounds like the money is going into a Money Market fund? Which from there it should be going into the 3 Funds you mentioned above. Although the money market fund should be doing better than 2%.
Also, you should NOT be getting hit w/ a 5.75 percent hit if the money is just sitting in that (bank account/Money Market) account.
Is there any way you can scan these docs and white out all the personal information?
I think what was happening was the contributions were received and placed into this Bank Deposit Program. I'm quessing kind of like a money market account, but shares of the mutual funds were never purchased. So the money just sat there. The small intrest she was earning was what caught my attention 8 months ago and a friend of mine who works for Primerica mentioned these three funds for my wife to invest. Since then I have tried to become more educated on picking funds myself. I don't have a scanner but what is going on now is the money is received then placed into the bank deposit program and then shares of the three mutual funds are purchased. It is at this point that she has the 5.7% fee. I don't think there were any fees before hand, but I could look at the paperwork and verify.
I don't plan on being a pain in the ass with guy or even give him a hard time. I just want be to prepared and have some options going in.
ok that's good info.
don't go in screaming. emotions and investing don't mix well.
your wife, i believe, would have had to make a statement to the advisor about her risk level. he will have recorded this information as it would be used to help protect the firm if the investor sued.
he doesn't and will not. he is only interested in one thing: maximizing his income.
i rest my case. 98.9% of "advisors" = bad news.
this is what most incompetent advisors do -- they blame you. they tell you, after the fact, that "you are responsible for your strategy and your investments." now ask again, what was the 5.75% load for?
the fact is that yes, "you are responsible for your strategy and your investments". keep this in mind, and keep other's hands out of your pockets.
always stay calm. remain clear headed. i know it's your/your wife's money at stake -- but getting excited just clouds your thinking. you can always say gently, "right now, i'd like to speak with your immediate superior about continuing my investments with SB. based on past history, i don't feel comfortable with investing through you. this isn't personal, it's just business -- and this business is my wife's retirement funds." do not allow anyone, especially at an investment firm, make you feel like they are doing you a favor. they are not -- not in any way whatsoever. to them, you are a profit center, a source of income for them, pure and simple.
if the advisor has been scalping 5.75% off of your wife's contributions and those contributions were going into what was essentially a money market fund, i would take the "go get your boss" approach right from the outset. i would say, "hi. i have a little problem. if i understand things correctly, your associate Mr X has been charging my wife a 5.75% load on contributions to a money market fund. help me understand why."
now then, don't expect that the boss is going to roll right over on his guy. that's not the way an investment firm works. after all, the advisor is kicking money upstairs to the boss in this giant pyramid scheme. there is going to be a lot of hand waving (again). the boss is going to do all of the talking while the advisor keeps his mouth shut. this is to get you to believe that the boss exerts authority and has expertise in these kind of matters. stay calm and stay focused.
after he finishes talking without answering your question, just repeat it: "if i understand things correctly, your associate Mr X has been charging my wife a 5.75% load on contributions to a money market fund. help me understand why." eventually, you will get an answer that will, in so many words, make it all clear to you: "because we could". you know what to do then -- leave. complain to the administrator at your company about the practices at with the advisor. talk to others at work about the malpractice that it going on. the worst thing for the investment company is their investors having knowledge about the ways they are getting ripped off. encourage your company administrator to move the company plan to Vanguard, Fidelity, or T.Rowe Price -- where the employees won't get ripped off and they'll have thousands of low cost, no-fee mutual funds to choose from.
right now i'm going to say something that is probably going to come across wrong to some folks -- and i will hear about it in spades: if your SB advisor is less than 35 years old and has not been with SB for at least 5 years, get a new advisor. there is HUGE, IMMENSE, INCOMPREHENSIBLY RAPID employee turnover in the "advisor"/planner/consultant field. this is due to a "get rich quick" mentality and the ease at which one can hang a "finanical planner/consultant" sign on the front of their desk. those advisors that make it to age 35 are usually doing something right since they have not been bounced out of the company, are no longer cold calling (aka mining for suckers), and have managed to retain a stable client list via good relationships and good investment performance. this is the guy/gal you want.
scroll back up to where i said to ask the advisor for a list of no-load, less than 1% ER funds that you can get through them. follow that path.
the money market account rates for the past two years has been roughly 5%.
what happened to the other 3.5% to 4% in interest payments?
Ask your advisor if he owns the funds that he recommends to you. Chances are he will. There "may" be a few bad apples out of the 25,000 licensed reps Primerica has, (and newbies) but I can almost garentee you that nobody has a better track record than Primerica when it comes to complaints to the NASD.
A quick example, Bruce Sankin, author of "What all stock & mutual fund investors should know!" said in public and to me in person (b/c I quite frankly didn't believe him) that out of 23,000 cases submitted, 18,000 were closed, and not ONE case involved a Rep from Primerica. Bruce is a former Arbitrator and mediator specializing in securities. Meaning, he was the middle man between the client (who felt they were ripped off ) and the Brokerage firm that did/nt rip them off or cheat them in any way. Bruce is also a client.
Just to clarify, I don't have a issue with Primerica. When I reviewed my wife's statements 8 monthes ago I knew her money wasn't being invested it was just sitting in that bank deposit program. I have a friend who works with Primerica who I asked to look at the paperwork to confirm my suspicions. He agreed with me and just off the top of his head recommended a few mutual funds. We were going to meet again and discuss better long term options for my wife's IRA, but I have a problem with that. First, my wife's SB rep should be doing that not my friend who works with Primerica and second I really need to be more educated so I can make an informed decision.
Thanks again for the advice. Don't worry I'm not going to bust up the SB rep.have1) What fees did she pay while the money was sitting in the bank deposit program? and why?
2) Why did the money sit there for so long without being invested? (I'm sorry I can't let that slide.)
3) What funds do you recommend? and why?
4) The question you suggested
5) What fees will she be paying?
6) What service does she get for the fees?
7) What funds to you invest in? (Kansas kid's suggestion)
Great questions. If your friend is securities licensed... just move it over to him if you don't mind the small fees. Just a thought. Keep us posted.
My opinion is most financial planners** are as ar-jedi said SALESMEN looking for their highest commision, for them and their employer. Large cap/md-cap/small-cap/sector funds are usually b shares where you only pay a small load going in (Vanguard 0.5%) and nothing coming out! @ 28yrs old it sounds like you're wife has whats needed>>> TIME for cash$$$ appriecation/gain. GOOD LUCK!
Well we had the meeting and I decided I don't like my wife's retiremnt plan. We will just have to make the best of it since her boss contributes 3%.
1) What fees did she pay while the money was sitting in the bank deposit program?
None, the bank deposit program is a money market fund with intrest based on the amount you have in the account.
2) Why did the money sit there for so long without being invested?
This is a self-directed IRA, your wife never told me what funds she wanted. He even tried to take credit for the funds she is currently in, but I corrected him on that.
3) What funds do you recommend?
There are many funds that Legg Mason offers that are good. The only one he actually recommended was Legg Mason Partners Aggressive Growth. This question was asked 4 times over our 1 hour and 15 min. meeting. It got to the point where I would say a fund and he would comment on it.
4) No load funds?
There aren't any we would have to close up shop if we didn't make money on the funds
5) What fees will she be paying?
Depends if she chooses Class A shares or Class C shares. He recommends class A which is 5.7%
6) What service does she get for the fees?
We buy the mutual funds for her. We will give advice. See question 4. He would not commit to any funds by name.
7) What funds to you invest in?
Over 50% of my portfolio is in large cap growth a good portion of that is Legg Mason Partners Aggressive Growth. That was the only answer he was willing to give
Don't get me wrong I realize a good portion of the blame falls on my wife, I just feel at some point he should have called her and said Hey you may want to invest your money in some mutual funds.
He did pitch another program which obviously cost ,more it's called TRAK, a personalized mutual fund advisory service:
It just boils down to we either pick the TRAK program or I become more educated and pick funds for her. I've started reviewing some and will post for advice later.
Thanks again for the suggestions,
i truly believe that this thread should be tacked... advisors -->
99.9% of money market funds are paying over 4.75% right now, and 99.9% have been over 4.5% for at least two years. having a sliding scale for the size of the account is incredulous.
it's the "circular reference" that i noted above. they blame you, charge you for their expertise, but offer no advice.
he must be a complete toad if he could not reel off at least a half dozen funds that would be suitable for your wife's age and risk tolerance. hell, i could do that and i'm an engineer by day and an amateur investor for only a couple of hours a month.
this is a blatant, red faced lie. Vanguard, Fidelity, T. Rowe Price, Dodge and Cox, and hundreds of other fund companies offer no-load, very low ER funds. how is it that these companies have somehow stayed in business?
stupifying. really, simply, truly incredible. they do nothing, they can't make simple recommendations, and they take 5.7% of your money.
he must be a complete idiot -- not only does he not know what he is doing he can't even fake it. buying the mutual funds does not cost anything, or i should say, not anything near 5.7% of the investment. maybe 0.1%.
think about this for a second: "would not there be a fixed cost for the transaction? i mean, whether i buy $100 worth or $1000 worth of a fund, it's just a transaction in the computer. why does buying more of the fund cost me more? why don't they charge me, say $8, for a transaction, just like a stock purchase? after all, it's basically the same thing!"
and herein lies the reason: they want to make as much from you as they can. they will do everything they can to bleed money from you, skimming it from wherever they can. the advisor is not your friend -- he is an expense to you.
that's because he only has about $2500 saved up.
no. run. run far away. this is yet another "let's milk the client for even more" scheme. you will gain nothing from this, and your wife will pay more in expenses. whatever color brochure you were given on this plan is a meal ticket for the advisor, and him only. the advisor must believe everyone who walks in the door is a complete dumbass if, at first, the client asks about no-load funds and then later he offers them a more costly plan...
it's unfortunate that two things are going on here:
1) your wife's employer picked a poor administrator for the company plan. "poor" means that the costs to the employees are high, and they have no other choice. aside: this is a very common situation in education, where school districts and the NEA get kickbacks from insurance and investment companies who sell teachers into EXTREMELY COSTLY investment schemes. some "advisors" even go as far to market annuities to teachers -- within their 403b plan. in other words, they are selling teachers on a tax-free vehicle (the annuity), inside another tax-free vehicle (the 403b). guess who makes out handsomely on this scheme? it ain't the teachers, i assure you.
2) the advisor assigned to your account is a complete idiot.
your wife, btw, should bring this up with her employer. they are not doing the employees any favors with the current situation. the plan, from the employees perspective, is a rip off. even if the company matches 3%, the load at 5.7% swamps that. you are still losing 2.7%. following that logic, the employees would be better off NOT getting a match from the employer, but being in an investment plan that allows no-load funds.
let us know your fund options and we can make some recommendations.
this is incorrect.
how timely that this article should pop up today...
here are the authors and the abstract of the referenced study:
from the first paragraph:
summary: read and learn from the linked PDF.
You hit the nail on the head, my wife's employer did pick a crappy plan. He would have been better starting a simple IRA through Fidelity alot less fees for him and the employees. The three percent was about $1700 dollars for 2006 so it would be hard for us to walk away from that money. Well I've been looking at alot of funds over the last several days. I spoke with the administartor of my Hartford 457 plan who suggested the following :
25%-30% Small/Mid Cap
The rest large cap growth.
I've listed a few funds I've been looking at. These funds are a little short on small cap/mid cap, but I threw in some specialty funds. I don't think the Janus funds will be available since they are no-load funds and I'm pretty much stuck with funds that are either class a or class c.
American Funds Capit CWGIX 10%
American Funds Grth AGTHX 15%
BlackRock Health Sci SHSAX 10%
Hartford Capital App ITHAX 10%
Janus Adviser Intern JIGRX 10%
Janus Growth & Incom JAGIX 15%
Legg Mason Partners SHRAX 10%
MFS Utilities A MMUFX 10%
Royce Value Plus Ser RYVPX 10%
I may be to diversified but I was just trying to look at many funds as possible.
how did you make out with the changes to the plan?
If you are stuck with loaded funds, find out if your advisor can sell you ETFs (a mutual fund packaged as a stock). If your wife can own stocks in her IRA, this is a way to buy index mutual funds with very low expenses, and the only fee is the stock commission, typically around $15-$25 depending on how greedy the house is. You can learn about ETFs on Yahoo's finance pages (http://finance.yahoo.com/etf).
For example, say the stock commission is $20. You would put the contributions into the money market account you mentioned until you had enough for at least a $1000 order. A $20 fee on a $1000 order works out to 2%, which is much better than 5.7%.
The tricky part here is to work out the portfolio. I personally think you have too much complexity (I love simple stuff). Also, despite being called "growth", growth stocks don't necessarily grow; in fact, over time, it has been shown that "value" stocks slightly outperform growth stocks. And small stocks slightly outperform large ones. Also buying individual sectors is tricky because they can be more volatile; if you bet on the wrong horse you lose.
I would consider something like this (this is similar to my actual retirement portfolio):
If you want to add more "spice", you can value tilt by buying a large and small value index fund in addition to (not instead of) the large and small stock funds. You can also get an emerging markets index fund. If you want to be most aggressive, you may want to go without the total bond fund.
Another way to minimize your exposure to the front end load would be to try to buy a "do-it-all" mutual fund, and go for the fee breakpoints for larger holdings. For example, in the no-load universe, a good do-everything fund would be FFFFX (Fidelity Freedom 2040). These do all the asset allocation for you, and adjust over time from more aggressive to least aggressive.
Well my wife a week ago got the oppurtunity to point out to her boss about the crappy retirement. He said he was not aware that the fees were so high. He said he was concerned because he should be paying the same fees. He was going to check on it. Well my wife feels he is probably just going to drag his feet and leave it the way it is. I know a guy who works at the Mutual Fund store who made a pretty good recommendation to me. He said for my wife to continue contributing to the Simle IRA, so she can still get the employer three percent but instead of investing in mutual funds put all her money in a Smith Barney money market account. That way there are no fees. Open a Schwab rollover IRA account (Thats who the Mutual Fund store uses) transfer her current balance and all future balance into the Schwab account and invest in mutual funds with the Schwab account. That way there are significantly less fees. He explained that with a simple IRA all money is immediately owned by the employee and can be transferred to other retirement accounts.
I have gathered some information for my wife's boss to look at regarding other companies to handle the Simle IRA. The Mutual Fund store being one of them.
Anyways we shall see how things pan out.
Blood donor thanks for your recommendations.
Assuming that ONLY front-load funds are available (and I believe the SB guy was lying or wrong about that), then you are better off on your own.
if the 3% is $1,700, your wife contributed about $56,600.
However, the 5.7% fee is a whopping $3,226-ish. So the net contribution is $55,072 (approx.)
If you were to go it alone without the 3% match into a no-load fund, the net contribution would be ... basically the same thing she's putting in now, $56,600, a gain of FIFTEEN HUNDRED BUCKS over what she is doing now.
Anyway like I said the above only applies if SB absolutely can't get you into no-load funds; I think the guy is lying or mistaken.
I thought this too, at first, but it it probably is not that. The 3% is probably the matching contribution; her salary is $56,666. So she put in $1700 and her boss put in $1700. Losing the $1700 would be a 50% loss, much worse than 5.7% front end load.
Just a bump and a comment, Merrill Lynch Suxors. Avoid Like Plague!
Do you know what share classes even are?
And what does your Vanguard experience have anything to do with your statement that funds "are usually b shares where..." which is flat wrong.
Read prospectus. I'm not doing your homework for you.
Capitalization and sector has nothing to do with share classes.
are you trolling? you can't be serious. ok i'll bite.
You even claim your own ignorance...."I do not read..."blah blah...get the facts straight.
Read the prospectus, VFINX for example..
What will that prospectus tell you? There is no B-share.
aside, you have the B share definition and nature completely backward. 0% load buys, declining % fees for redemptions (sells). B shares have higher expense ratios and are costlier than A shares to hold long term. oh and you did not know B shares convert to A shares automatically? Further, B shares are being eliminated by the industry as they are a source of many complaints, often misrepresented by advisers and are of little benefit to the consumer. oh and did you not know advisers get paid full commission for B shares, just like A-shares?
What motivates me the most to post is people like you who claim to have some knowledge and then have an opinion based on that, non-fact, then lead others astray.
I will have a nice day now
one thing I missed due to your editing.
in your erroneous statement above, you associate equity style with share class, so you know nothing and did state otherwise.
Your always right jimmy.......dont have a stroke now........... However I'll stick w/my B shares that take .5% going in and NOTHING going out with the initial .5% being the only ER UNLESS its less than 10k in VG S&P 500 fund, less than 10k per index they charge you 20bucks a year... PER INDEX. THIS persons THREAD is no place to waste time arguing about FACTS that can easily be looked up. Go read a prospectus. You need some learning!
the above sentence illustrates that you have a serious miscomprehension about how the expense structure of mutual funds works. i suggest that prior to writing another emoticon-laden post that you first spend an evening learning what terms such as "share class", "load", "ER", and so on actually mean in the context of costs to you. moreover, i recommend that, in the future, you actually read the prospectus of funds that you are considering purchasing -- the material that the mutual fund company provides will explain the entire cost structure of their fund offerings.
Maybe Im just ignorant, I can be educated. Is what I've stated wrong? Share classes=A,B,C or whatever. "load"=what is paid out initaily and yearly. "ER"=a yearly cost? right? I'm a simple person thats why I invest in what I think are basics.
it's worked the way I expected so far.
(revisit thread) I'm a booglehead, as ar-jedi is a wealth of information he'd know VG has some of the lowest sales charges @ .5% and is mainly a sector and index funds only sort of place. There is a wealth of information here.
i think you just need a little clarification on the terms, and then when we fit them all together you will see how it works.
load: load is a term used to describe a one time fee assessed on investment monies, which in essence is payment to a broker or management company for finding, marketing, or otherwise selling you a fund. the short of it is that the load is a commission to the broker. the load is deducted from your principal and is never seen again -- although your broker will use it to buy a new Lexus. some loads are called "front end" in that they are charged at the onset of the investment. some loads are called "back end" in that they are charged when you exit the fund. there are combinations of the two and breakpoint (sliding) loads as well. with the latter, the more you invest the lower the applied load is.
the clever part of a front end load (from the broker's perspective) is that you pay it every time you invest more in the fund. for example, if you initially invest $10K, and there is a 5% front end load, $9500 drops into your account and the broker pockets the other $500. a year later, you invest an additional $5K; the load is assessed again and $4750 goes into your account while the other $250 goes to the broker. you could say that this is a "contribution tax".
the clever part of a back end load (again, from the broker's perspective) is that you pay the load on an increased investment. for example, if you initially invest $10K, and there is a 5% back end load, $10K drops into your account and the broker pockets nothing initially. later, say 7 years later, your investment has doubled and is worth $20K. you decide to buy a new car. you withdraw from the fund, and the 5% back end load is then taken from the $20K, so the broker pockets $1K. some back end loads decline as your holdings increase, or as more time passes. note that you may hear a back end load called a deferred sales charge.
brokers and mutual fund companies have defined broad terms which somewhat inexactly describe all of the various loads. in general,
class A shares = front end loads
class B shares = back end loads
class C shares = smaller or no front end loads than class A but usually higher annual ER's.
class D->Z shares = derivatives of the above, in many combinations.
12b1: this is an annual charge specifically for marketing or advertising a fund. ideally it should be ZERO but fund companies can legally charge it to you as an expense, so some do.
expense ratio (ER): a mutual fund management company naturally has expenses, such as: paying analysts and traders, operating a web site, paying folks to answer the phone and address your questions, bills to the printing company to generate monthly statements, postage to mail those statements to you, the rent in the buildings they work in, the electric bill, and so on and so forth. the ER is expressed in a percentage, and is deducted from your account annually but in a manner that is mostly transparent to you. you simply see it as a reduction in your gains (or correspondingly an increase in your losses).
above i have summarized the three main expenses associated with a mutual fund. sales charges (aka loads), 12b1 fees, and the annual ER. note that the 12b1 is generally rolled into the ER so it may not appear as a discrete expense.
let me get to the crux of the above. mutual fund costs matter to you -- they reduce your initial investment, and annualyl reduce your gains. one important aspect of investing is to keep others' hands out of your pockets. the securities industry is full of folks engaged in a brutal, zero-sum game to transfer money from clients (the you's and me's of the world) to themselves. you need to be aware of this and vigilant about defending against it.
in our society, we are taught that excellence costs money. the best doctors, the top baseball players, the nicest cars, the finest watches -- these all cost lots of money. in the securities industry, at the retail rung (again, you and me), it is backwards. don't let anyone convince you that by paying more you are getting more. it can be shown academically and via past history that paying your broker more nets you less. the trick here is that you have to learn a little bit for yourself.
there are thousands of excellent, no-load funds in the mutual fund universe. there is no reason whatsoever to buy a fund with any kind of sales load. in many case, an individual investor is sold the expense of the load by the broker who insists "this is the price you have to pay to get into the game". this is hogwash, as is a broker's stipulation that a load fund will perform better than a no-load fund. read ANY modern mutual fund text and the author will demonstrate that over time, no-load funds outperform load funds.
vanguard, fidelity, t.rowe price, and other fund companies offer many, many funds with no loads, no 12b1 fees, and very low ER's. vanguard, in particular, is on a single-minded crusade to lower costs for individual investors, much to the chagrin of the rest of the securities industry. if you have your investments directly with vanguard, you can be highly confident that you are getting the lowest costs possible. i want to emphasize that it is important that you purchase funds directly from the fund company, and not through an intermediate broker. the addition of a middleman is detrimental to your finances.
Nice LONG post Jedi but I want to know how America is going to get the majority of it's citizens to stash away money for retirement? You realize that mutual fund companies are not stupid by selling loaded funds.... who is going to sell the most shares of XYZ Fund? 30,000 Licensed Agents or a person who makes posts on a forum in his free time?
when you have a sales force of 30,000 strong, don't you think
A- The funds are going to get marketed and sold to the general public... why? Because there is a lot of money to be made by helping people.
B- The average Joe who doesn't have the knowledge or time to sit on a forum and learn how to invest, is going to get somebody (Agent) to MAKE them invest because it's in their best interest.
It's a win-win situation. Most the folks I see think that just because they checked a couple boxes in their 401k plan that they are set for retirement. Most don't even know what a Roth IRA is and why they should have one.
I guess Richie Freeman is a crook for allowing his fund to be loaded?
be careful grabbing the balls of a bobcat while the two of you are locked in a phone booth...
it's called "education" and it's the enemy of "advisors" everywhere. the last thing someone trying to sell something wants is a smart, switched-on customer.
i think the word you are looking for is "greed". the money is there, the people are (in the advisor's eyes) stupid, so why not just take some? i mean, a little off the top, here and there, a few percent a year, continued load paying, etc -- who's it going to hurt? we'll just take a little itsy-bit at a time, the client will probably never even realize it's gone.
i know now that you fear educated investors -- all advisors do: it impacts their income.
you mean, "there is a lot of money to be made by keeping folks in the dark regarding investments that would outperform the ones most advisors are selling, and regarding investments that would cost a heck of a lot less over the long term."
this is EXACTLY why i and many others recommend using a "fee-based" financial planner. investors pay once to get advice and a plan, and then they implement that plan using low cost, no-load mutual funds -- which have been shown to outperform load funds. contrast this approach to paying a load to get into a fund with an excessive expense ratio, and then paying that load again and again for future contributions despite the fact that there is absolutely no additional benefit to the investor by doing so.
i teach adult education classes at a community college so that folks (a) know better, and (b) they don't get fleeced at the hands of an agent marketing expensive funds. since i am educating folks about investing, i am therefore your enemy. i realize people like me are costing you and your industry much profit. fire away, and ridicule at will. your most profitable approach as a business is to keep your clients as dumb as possible -- this maximizes your profits. tell me, when did you ever say to one of your clients -- "listen, you'd be better off with an index fund or an ETF, there is no load, it will save you on yearlt and contribution expenses, and you'll be better off at tax time as well."?
let's say your rock star guy does as well as the market...
as far back as I have EAFE Returns for... using a simple 4 slice portfolio.
- S&P 500 Index
- EAFE Index
- FF Small Value
- 5 Year Treasury Bonds
5000.00 yearly contribution
covering 1969-2005 inclusive...
without the 5% Load
with the 5% Load
when you paid the 5% load you invested a total of 9,250.00 less... and at the end of year 37 you earned $188,618.15 less than the investor that paid NO Load.
OVER THE COURSE OF 37 YEARS, MORE THAN $188,618 OF YOUR EARNINGS DISAPPEARED BY CONTRIBUTING INTO A LOADED FUND!!!! and, that's simply if the fund did as well as the market -- suppose it did worse as many load funds do? you would have paid for underperformance!
was your wife and her boss able to make any changes to the plan at work?
Her boss does not want to change retirement plans. Apparently his fees are significantly reduced due to his balances. So in Oct, after the two year ownership IRS rule, we are going to rollover her current balance to either a TR Price IRA or a Vanguard IRA. I have spoken with a rep with TR Price and we can set it up so that every quarter her balances are deposited electronically. I really like what TR Price has to offer, of course it's hard not look at Vanguard's options when you consider their fees. I've done some reading on the subject (Mutual Funds for Dummies, Boogleheads Guide to Investing, and that internet Investment Guide that you posted) so I feel better about picking my wife's mutaul funds.
Thanks for asking,