Some mutual funds have investors pay what are known as “loads” when you either enter or exit the fund. What most people don’t know is that they are a simply a cash incentive for your broker and don’t guarantee success. They are a complete scam.
A load is no more than a cash incentive /commission for the broker or salesperson that refers you to the fund. There are two types of loads:
- Front-end Load: A percentage fee of the total investment paid when entering the fund. So, if are looking to invest $5,000 into a mutual fund with a 5% front-end load, you are going to pay $250 in commissions to your broker who is your “best friend” and knows what’s best for you. After the commission you only get $4,750 deposited into the fund, effectively putting you into the hole before the mutual fund even starts investing it.
- Back-end Load: A percentage fee of the total investment paid when exiting the fund, typically on a time table. Let’s say it is a 7% back-end load, well every year you stick with the mutual fund, the % fee drops 1% until effectively you don’t have to pay it. These are just as useless as the front-end load, because you are handing over a hefty portion of any profits you made, if you even made any, to your broker!
The worst part is that besides the load you still have to pay the yearly management fee to be in the fund. And, if you read my post on mutual fund management fees, you know they can get out of hand. To top this all off, research shows that there is no connection between load funds and higher returns. In fact, when you take into consideration the load fee, these funds actually are proven to be worse than no-load funds.
To end with a story, my grandparents last year entered a 5% front-end load fund because it was recommended by their broker, and I couldn’t figure out why my Dad was so ticked off about it. My grandparents always talk up their broker because he gives them cookies and punch and is so nice to them every time they come in for their “portfolio checkup”. I wonder why that is? My grandparents were effectively hosed by their broker, the person they trust more than anyone, and to top it all off the mutual fund has a something like a 3% yearly management fee. What a waste…