In the world of investment options, load mutual funds and the financial advisors who promote them may seem outdated. They are often compared to riding a horse and buggy when there are zippy new exchange-traded funds available. However, it's important to note that there are still excellent load funds managed by top professionals at reputable firms.
Among the 10 largest mutual fund families, six offer a wide range of load mutual funds. These include American Funds, J.P. Morgan, Franklin Templeton, Pimco, MFS, and BlackRock. What's even better is that many online brokers have waived the commissions associated with purchasing these funds, making them even more accessible.
According to regulations, load funds can charge a maximum sales fee of 8.5% of your investment. However, most funds charge in the range of 3% to 6%. Additionally, funds often reduce commissions for higher investment levels.
But the truth is, you don't necessarily need to pay any commissions if you only want access to the fund without any financial advice. Several reputable brokers, including Charles Schwab, Fidelity, E*Trade, Ally Invest, Firstrade, and Interactive Brokers, waive the loads on many popular funds.
For instance, let's take a look at the A share class of the $26 billion JPMorgan US Equity fund. Over the past five years, it has outperformed the S&P 500 index and 94% of its peers in Morningstar's Large Blend fund category with an impressive annualized return of 16.1%. Despite this achievement, it carries a 5.25% load.
However, if you choose to invest in this fund through E*Trade by using its JUEAX ticker symbol, you'll notice that the "Front-end Load" has been waived. On December 2022, E*Trade made a groundbreaking move by offering all 4,194 mutual funds in its warehouse, including 2,283 funds that typically carry loads, without any transaction fees. This change makes investing more attractive to both investors and fund companies, especially in the face of competition from low-cost ETFs on E*Trade's platform.
"Retail investors in general are very cost-conscious," says Chris Larkin, E*Trade's managing director of trading and investing. "With the elimination of commissions, there's a heightened expectation from retail investors that things should be free. For load funds, adapting to become no-load funds is a smart strategy to attract more assets."
In conclusion, load mutual funds offered by reputable fund families and brokers can still be a viable investment option. With waived commissions and the potential for strong performance, these funds provide investors with unique opportunities to grow their wealth.
Mutual Funds vs ETFs: Are the Higher Fees Worth It?
The Value of Star Managers
While ETFs are popular among clients, some investors actively seek out star managers who have demonstrated exceptional performance in the past. In some cases, these star managers may only be accessible through load funds, which means investors would need to pay a fee for their services. Despite the higher cost, many investors are willing to pay for the expertise and track record provided by such managers.
BrandywineGlobal High Yield: A Standout Performer
Among the top load-fund families, BrandywineGlobal High Yield has consistently outperformed its peers in Morningstar's High Yield Bond fund category over the past five years. With total assets of $1.7 billion, this fund has managed to beat the category average return every calendar year since its inception in 2015. While it carries a 3.75% load, many brokers waive this fee for their clients.
Exploring Cheaper Alternatives
Although a star load fund may offer outstanding performance, it is still necessary to assess if there are cost-effective ETF alternatives available. For example, JPMorgan Large Cap Growth, with $78 billion in assets, boasts an excellent record. However, investors may find the JPMorgan Active Growth ETF more appealing due to its lower expense ratio of 0.44% and a similar investment style.
The Downside of Hiring Load-Fund Advisors
Investors seeking financial advice should be cautious when hiring advisors compensated by loads. High commissions can create conflicts of interest, as advisors may be tempted to engage in excessive trading to maximize their commissions. This practice, known as churning the portfolio, can be detrimental to investors. To avoid this conflict, many advisors now charge a flat hourly rate or a percentage of assets under management.
The Changing Landscape of Load Funds
Don Montanaro, president of Firstrade, argues that justifying a load requires an advisor to bring five percentage points' worth of value. This high threshold makes it untenable and suggests that older clients in private-banking relationships, who may not pay as much attention, are the ones still paying loads these days.
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