Want to get some investment advice that is expensive and doesn’t perform any better than other, less costly options? If so, ask your broker or financial advisor for investing advice. They’re much more likely to point you toward an investment with a “load” — a fee that ranges in price but generally runs 3% to 5% of your investment’s value — simply for them “recommending” it (some would say “selling” it is more accurate.)
The kicker? Paying more for such a fund doesn’t earn you more, it actually helps to ensure your results are less than what you could have otherwise. The details from SmartMoney Magazine…
When you pay a load, you’re essentially paying for advice. A load is really just a sales charge you pay for buying a fund that’s available only through brokers and financial advisors — unlike, say, a Vanguard fund, which can be purchased directly from the company with no additional charge. So if the guidance you’re getting from your broker is helpful, it may be worth the price tag. But if you’re comfortable investing on your own, then you probably need it about as much as a fish needs swimming lessons.
While there are many good funds out there that charge a load — including those from American Funds, which are known for their reasonable expense ratios and solid team management — there’s also no shortage of solid no-load (and low-cost) alternatives. Cost shouldn’t be your only driver when it comes to fund selection, but higher fees can lead to weaker performance. It’s not easy to beat a comparable no-load fund when you’re starting $575 in the hole.
Money Magazine attacks the same issue from a different angle in its May issue (article is not online yet) when a reader asks what the chances are that he can pick mutual funds as well as a financial advisor can. Their response:
You’re just as good as plenty of pros at selecting mutual funds.
They cite a recent paper written by three business-school professors as support. Their research on funds selected by advisors versus ones picked by investors directly concludes:
The brokers’ choices are more expensive. And they have lower returns too.
Wait a minute. Financial advisors more interested in making money for themselves than for their clients? We’re shocked! — Free Money Finance
Load Funds [Ask Smart Money]