No-Load vs. Sales-Load: A Historical Performance Review

    There has been plenty of conversation and debate about the influence of sales-loads on portfolio performance. Frequently, financial planners will claim that funds with sales-loads have performed better than no-load funds, while others argue that no-load mutual funds can achieve similar fund performance. We'll seek to find an answer to one of the hottest topics in retirement planning.

    Sales Load and No-Load Mutual Funds

    It is important to explain very briefly the difference between no-load and sales-load mutual funds. Sales-loads are fees charged for the purchase of a mutual fund. Usually, sales-loads total around 5% of the total amount invested. Thus, a $10,000 investment into a sales-load mutual fund would cost $500, leaving only $9,500 to be invested into the mutual fund itself.

    Sales-loads may also be assessed as “backend sales-loads” or “deferred sales-loads.” These charges are tabulated and collected after the fund is sold. However, most funds do not consider the growth of the fund into the sales-load and collect fees on either the current fund value or the value of the initial investment, whichever is lower.

    Thus, if an investor were to invest $10,000 in a deferred, 5% sales-load fund that grew to $20,000, only $1,000 of loads would be assessed at liquidation. On the other hand, if the fund were to fall in value to $6,000, a sales-load of $300 would be assessed.

    The Financial Industry Regulatory Authority, also known as FINRA, aggressively regulates sales-load mutual funds to a maximum load of 8.5%. Few mutual funds sell for that maximum, with most aiming to avoid crossing the 5% threshold. Keep in mind that sales-load funds do not have to be wholly front or back-end loaded, and they may have fees for both purchase and redemption.

    A no-load fund is one in which no fees greater than .25% are charged either for purchase or redemption, though just like sales load funds, annual expense fees are assessed for the fund management. No-load funds may also hide other redemption charges, especially flat rate sales fees for the sale or transfer of cash between mutual funds. This information is available in the fine print in the prospectus.

    Breaking Down the Arguments

    The battle lines between no-load and sales-load camps are usually broken down by fund performance and fees.

    Proponents of sales-load funds argue that a sales-load allows funds to charge lower annual expenses over time, and lower annual expenses allow for investors to see greater compounded growth. Deferred sales-loads also encourage the management or salesperson to pick winning funds for their clients, since the salesperson and fund company are rewarded only after the investor cashes out. If an investor were to lose money in a deferred sales-load fund, the salesperson's commissions and the earnings of the fund management would also decline.

    No-load proponents argue that no-load funds often have annual expense ratios in line with sales-loads. Likewise, to counter claims by sales-load proponents, those in favor of no-load funds say that front-end loaded funds encourage financial planners and salespeople to push more expensive funds over other less expensive alternatives.

    Examining the Data

    Extensive research has been completed to find a difference in performance, if any, between sales-load funds and no-load funds. The conclusion of most researchers is that no-load funds, over any period of time, frequently beat the average sales-load fund in raw performance.

    One of the most well documented and widely-accepted study was completed by Craig Israelsen in the Financial Planning Journal that found no-load funds outperformed sales-load funds by .1-4.25% during the very volatile period of 2000 to 2002. This study was completed at the height of the no-load versus sales-load back and forth, and since the time the study was published, sales-load funds have been in decline.

    In earlier years, sales-load funds had a minor edge over no-load funds, due primarily to the difference in investment objectives between sales-load funds and no-load funds. Prior to the age of digital banking and open stock markets, accessing foreign stock markets was expensive, especially in emerging markets. Thus, these adventurous funds usually charged a sales-load to cover the cost of trading in foreign markets, but provided returns greater than what could be found on domestic, no-load funds. Today, however, the difference is no longer visible, with no-load funds outperforming by sector, where the sales-load funds previously out-performed in the raw, researched data.

    There is, however, one very demonstrable benefit of sales-load funds: investors do tend to hold onto them for longer periods of time. Thanks to high sunk costs, it is inefficient and even unreasonable for investors to make frequent trades among sales-load mutual funds, as a large fee is assessed for each transaction. Therefore, where a no-load fund owner might close out early, or be more prone to chase hot sectors, sales-loads keep investors in place, making rapid trading uneconomical. Of course, for most investors, this is only a minor concern, since most mutual funds are purchased as part of a long term retirement plan.

    Avoiding Sales Loads

    Most commonly, sales loads are attached to retirement plans and accounts where the investor has very few options. They are routinely found in 401ks or IRAs, and they are aggressively sold by commission-based financial planners because of their higher commissions.

    Most financial planners sell both no-load and sales-load funds, which should be compared against one another at the time of purchase. While there is nothing inherently bad about purchasing a sales-load fund, know that the money is going to the financial planner and not to your retirement account. However, do consider whether paying a sales-load on one or two funds is worth the advice of a planner. A financial planner who offers only sales-loaded funds is likely not looking out for your best interests as a client.

    Likewise, be sure to have all fees associated with no-load mutual funds explained prior to purchase. Just because no-load funds are named such does not, in any way, mean they are without fees for purchase or redemption.
    Tim Ord
    Ord Oracle

    Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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