Load-Waived Funds

  

Categories: Mutual Funds, Metrics

Wanna get a mutual fund that normally sells with a load or a commission? Invest a million bucks. Hold it a year or more (usually). And it's yours, no load.

How does this "volume deal" magic happen? Does the broker just donate her commission in that situation?

Um, no. Brokers have boats to buy, mortgages to pay, alimony payment lawsuits to defend. Instead, in the case of a million dollar investment, the people who manage the money essentially fund the broker's commission.

Like...let's say that volume deal commission would be 1.5%. Well, the fund managers then would take 1.5% out of the million bucks they're managing that year (for a fee of, say, 1% a year), and pay that broker quarterly to make up the $15k they've earned in commission. Note that the fund managers collect "only" $10k in management fees that year for managing that money. If the buyer of that million bucks' worth of mutual fund then sells after a year, the money managers usually eat that $5k of loss.

But that event is relatively rare. Most mutual funds are bought to be held a long time, and the odds that the investor holds 10 years or longer are usually way higher than that they sell after a year. (And if they sell before a year, usually they owe some pro rata amount of commission for having jerked everyone around.) But on a 10-year hold, assuming that million bucks doubles in that time period, the fees collectd should vastly dwarf the $15k of commission paid to the kindly, loving broker.

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Finance: What are Sales Charge and Sales...1 Views

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finance a la shmoop what are sales charges and sales loads sales charges or

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loads as they're lovingly called in the industry are just commissions customers

00:13

pay when they buy mutual funds but because there are so many ways in which [People dealing out cash]

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to pay these commissions or at least in the way they get calculated they become

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a whole trivia contest catalog on their own in the good old days things were [People playing a trivia contest gameshow]

00:26

simpler mutual funds were paid in a load up front like you bought a thousand [Stacks of cash appear]

00:31

dollars worth of a mutual fund paid 50 bucks for the privilege and then the

00:35

professionals you hired went to work with your remaining nine hundred fifty

00:39

bucks to make it you know grow but then came break points basically volume

00:44

discounts as they apply to the pricing of those commissions the more you invest

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a smaller the percentage you pay in Commission then came quote no-load

00:53

unquote funds which instead of charging say five percent upfront and then

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investing that nine fifty under a fee structure of one percent a year they

01:02

started investing all thousand dollars with no Commission upfront but instead

01:07

customers would pay two percent of your commission so over time if mutual fund

01:12

buyers held that fund five years or more while they paid more than they would

01:16

have even in the most onerous of upfront a share load situations yeah not good no [Load comparisons appear]

01:22

low doesn't mean no commission or fee or sales charge it's just marketing stuff

01:28

for gullible consumers who bought it so why is it called the load anyway well [Person purchasing item from checkout]

01:33

the Commission itself detracts from the total amount of capital being invested [Commission cash taken from capital]

01:38

which then has to grow and presumably beat the market or you just buy an index

01:42

fund right well if a mutual fund investment house isn't in fact beating [Man and woman fighting in martial arts]

01:46

the market then mathematically there's no reason to buy the fund because

01:49

investors can simply buy the market in investing in those index funds or ETFs [Man discussing investments with index funds or ETFs]

01:53

or exchange-traded funds yeah so the load is essentially rocks in your

01:59

backpack or a natural headwind against the sales of that mutual fund they feel [Man on a boat with a headwind]

02:05

like a heavy load if you're ascending mutual fund mountain

02:09

with the 18 rocks there in your Patagonia pack and it's probably no [Man sweating with backpack full of rocks]

02:13

surprise that mutual fund mountain is Disney's least popular ride

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