Is it really a "no-load" fund?

Announcer:  I didn’t know I had to pay a fee when I sold my mutual fund.  I was furious.  I thought I had bought a “no-load” mutual fund.  So writes Tanya, a self-described “rookie” investor.  On today’s podcast, we’ll discuss Tanya’s email and get the low down on one of one of the most popular terms in the mutual fund industry – “no-load.” Tanya’s first leap into the market was far from reckless, but still it left her with a bitter taste in her mouth. 

Email Reader:  I feel so stupid.  I bought my first investment about two years ago – a mutual fund – from a broker, Scott, a former boyfriend of my sister.  As a broker, my sister gave Scott high praise.  

Announcer:  Tanya wasn’t comfortable choosing her own investments, but wanted to be comfortable with anyone that helped her make those decisions.  Her sister’s opinion meant a lot to her, but a loved one’s word was not enough for Tanya. 

Email Reader:  I did a BrokerCheck on Scott, which came up clear – no record of being disciplined.   This was the first time I was ever in a position to invest.  I had paid off all my credit card bills and even created an emergency fund of 3 months salary.  The mutual fund money was money that I saved  - on top of that.  No way am I handing that $5,000 over to someone with a checkered past.    

Announcer:  Tanya met with Scott and trusted his judgment. 

Email Reader:  We didn’t talk long – he asked me a few questions.  I remember telling him  that I needed a “big-term investment.”  No arguments here that I am a rookie investor.  Scott recommended a mutual fund – one that is advertised a lot on t.v.

Announcer:  Tanya was not familiar with the share class for that fund that Scott recommended.    

Email Reader:  I expected to pay a fee when I invested.  He said he was going to put me in a class that didn’t charge a fee upfront.  That meant all of my money would start working for me right away, he said.   Sounded good to me, so I said “let’s do it.”  What happened after that is a little fuzzy.  I signed a lot of forms, and Scott told me a lot stuff that I suppose lawyers understand.    

Announcer:  At first, the investment did really well.  Tanya even bragged about it to her friends a few times. 

Email Reader:  I would tell my friends – I know a great fund - you don’t even have to pay a fee when you buy it.  That’s a “no-load” fund, said one friend.  He said that he had bought a similar investment from his broker. 

Announcer:  After a while, the fund’s performance leveled off.  For the most part, Tanya rarely thought about the investment.  Then she needed the money quickly. 

Email Reader:  Dad got sick.  His bills started piling up.  I called Scott and he told that I would have to pay a 5% load if I sold my fund.  Because I had held it for less than 2 years.  I didn’t know I had to pay a fee when I sold my mutual fund.  I was furious.  I thought I had bought a “no-load” mutual fund.

Announcer:  In the end, she sold the fund and paid the fee. 

Email Reader: I needed the money – what else could I do.  

Announcer:  There’s an abrupt end to Tanya’s email:  What went wrong, she asks.  Joining us today to discuss her email and answer that question is Susan, our expert on Your Money. 

Susan:  Glad to be here. 

Announcer:  Let’s start with the term “no-load.” Tanya thought she owned a “no-load” fund.  Did Scott sell her one?

Susan:  No.  These funds don’t charge any type of sales load.  No-load funds don’t charge a front-end or back end load. 

Announcer:  And Tanya paid a back-end load – a fee when she sold the fund. 

Susan:  Right.  NASD also has rules on this.  If a fund’s annual 12b-1 fees exceed 0.25% of the fund’s average annual net assets, it can’t be called a no-load fund. 

Announcer:  12b-1 fees? 

Susan:  Sorry, I’m a recovering lawyer. 

Announcer:  Apparently, it’s a long road back . . .

Susan:  Maybe so.  12b-1 refers to a SEC rule.  12b-1 fess are . . . distribution fees.  Is that better?  Fees paid to cover marketing and distributing the fund to investors.  Both sales loads and 12b-1 fees are charged by the fund, but most or all of the fees typically go to the broker who sells the fund. 

Announcer:  So that’s how they get paid for the service they provide . . .

Susan:  Right, and if you don’t need help with your investments, you won’t pay those extra fees, though you’ll still pay other fees.  Self-directed investors can buy a no-load directly from a mutual fund company or brokerage firm fund supermarket. 

Announcer:  But Tanya did get help.  So what did she buy?

Susan:  Tanya likely owned a Class B share.  They don’t charge an upfront fee, but do charge a sales fee when you sell. 

Announcer:  Even if you hold it for the “big term”

Susan:  We kid because we love, right.  A Class B share’s back-end fee typically declines over time, and eventually to zero.  So long-term investors may not pay the fee. 

Announcer:  Tanya said she expected to pay an upfront fee -

Susan:  Yes – she was probably familiar with Class A shares.  They typically charge a front-end sales fee or load. 

Announcer:  But nothing when you sell

Susan:  Right.  Class A shares also charge 12b-1 fees, but they’re typically lower than B and C shares.  Because of the lower 12b-1 fees – which are only a portion of a fund’s annual expenses – Class A shares typically have lower annual expenses than B and C shares. 

Announcer:  C shares?  

Susan:  Oh, Class C – sometimes called the level load.  They have higher 12b-1 fees and overall annual expenses than Class A shares, but typically don’t have a front-end load.  Some impose backend loads, but these fees are usually smaller in amount than B shares.  Of course, there are other differences among the classes.  And keep in mind that the differences only relate to how much the investor pays in fees and how the broker will be paid for selling the fund.  It’s the same fund. 

Announcer:  Okay – now that we know a little more about shares classes.  Did Scott put Tanya in the right one? 

Susan:  Not enough information to know that.  But this can be a concern.  Because brokers may receive a higher commission for selling a Class B share than other classes, investors like Tanya should make sure buying a Class B share is in their best interest, not just their broker’s.  Tanya should file a complaint with the NASD and SEC if she thinks Scott acted improperly. 

Announcer:  Is that a big deal? 

Susan: Filing a complaint?  No, she can just go online to sec.gov and nasd.com and file it.  Tanya went to the NASD’s site to do the BrokerCheck.  Both sites can be great resources for investors.  

Announcer: Anything else you want to say before we finish up

Susan:  Kudos is due to Tanya.  She’s doing a lot of great things – saving, paying off her debt; using BrokerCheck to get the scoop on Scott – that’s impressive. 

Announcer:  That’s not rookie material.

Susan:  No, not at all. And sure – she could have done more to protect herself like reading fund’s prospectus, or asking more questions about her investment.  But she’ll do that in the future.  She shouldn’t let this experience discourage her. 

Announcer:  I agree – when she’s ready, jump back on that horse. Thanks for joining us.  Your Money is brought to you by the U.S. Securities and Exchange Commission.  Write us at podcast@sec.gov