Keep a Lid on Fund Costs

Question of the week:My financial advisor recommends that I buy a mutual fund with a 5.75 percent load. I'm reluctant to pay a load, but my advisor promises me that the fund is worth it. What's your take on fund loads? --James R.

Dear James,

A load is simply a charge for buying (or sometimes for selling) shares in a mutual fund. That chunk of money, which can go as high as 8.5 percent, will come straight out of your investment, with all or part of it going to the broker or advisor who sold you the fund.

We asked the Armchair Millionaire community for opinions on paying loads, and got a range of responses both pro and con:

"When I first began investing I needed advice and paid for it by buying funds with loads. It always took a while for a fund to make up for the cost of the load." --DSB

"I've bought both load and no load funds. The loads are well worth it for the advice I get because I cannot afford to pay an advisor an hourly fee." --Jennifer W.

"I have never bought a load fund because I want to keep 100 percent of my money working for me. The catch with no-load funds is that you have to do the work." --Forrest H.

Be sure you're clear about what you're actually paying for when you pay a load. It is not to get a fund with a superior return-there is no evidence that load funds perform any better than no-load funds. Rather, you're paying for assistance in selecting the fund. With thousands of no-load funds to choose from, I personally see no reason to ever pay a load for a fund, unless you absolutely must rely on a commission-based advisor.

It's important to understand that all funds carry some costs that lower your returns. Look at these very carefully because a fund with high costs has to perform better than a low-cost fund just to stay even. My quick guide will help you understand the range of fund fees.

The Armchair Millionaire Guide to Mutual Fund Costs

• Shareholder expenses are paid for directly by each investor in the fund. They can include sales charges (for load funds), redemption fees when you sell shares, exchange fees for transferring money from one fund to another, and annual account maintenance fees.

• Operating expenses are all the costs associated with running the funds and are deducted directly from the assets of the fund. They can include management fees to compensate the fund managers, a distribution fee (also called a 12b-1 fee) for marketing expenses, and other fees to cover shareholder services, such as mailings and the fund's toll-free phone service.

• The expense ratio is the total of all the operating expenses, expressed as a percentage of the fund's total assets. Low-cost index funds might have expense ratios as low as .2 percent, while a high-cost actively managed fund might have an expense ratio as high as 2.5 percent.

  At first glance, it may be easy to brush off a higher-than-average expense ratio, but don't underestimate the difference it can make. For example, let's say you invest $10,000 for ten years and get annual returns of nine percent before expenses. If this money is in a fund with an expense ratio of 1.8 percent, your money will grow to $19,741. If the money is in a fund with an expense ratio of just .4 percent, however, your investment will grow to about $3,000 more, or $22,744.

• To compare fees between different funds, read each fund's prospectus. All fund prospectuses are required to present a complete description of fees in standardized, easy-to-read tables. Also, the Securities and Exchange Commission has an excellent calculator that helps with expense comparisons on its Web site at www.sec.gov.

THE BOTTOM LINE: Historically, load funds have no advantages over no-load funds when it comes to investment performance. However, load charges may be a necessary evil when dealing with a financial advisor because that advisor deserves to be paid for his or her time and expertise.