Although I don’t invest in any mutual funds with loads or sales charges, I know that many people like to buy American Funds. Although they don’t do any print advertising or press releases, they are the third-largest fund company in the world behind Fidelity and Vanguard. Buying $10,000 in the Class A shares of the American Funds Growth Fund of Americas (AGTHX) would normally cost you 5.75% ($575) in sales fees upfront. Or since American Funds are only sold through advisors, perhaps you’re paying them an annual management fee of at least 1% of assets instead, or some combination thereof?
But new website InvestForLess.com would like to charge everyone a flat $250 annual fee and grant you access without any sales charges (turn down the volume since there’s an annoying auto-loading video).
From this Kiplinger article, it sounds like they are officially registered advisors, trying to sell their bare-bones services (i.e. access to advisor-sold funds) on a volume-based model:
InvestForLess is sort of like the Costco of mutual funds. It charges $250 per year for membership in its platform. Once you join, you can buy the “adviser” or “institutional” share classes of funds on its platform for free. This is possible because InvestForLess, despite looking and smelling like a broker, is structured as a registered investment adviser, with Trade-PMR, a broker-dealer, as its custodian. So InvestForLess members will have access to the same share classes that are available to other advisers on the Trade-PMR network.
However, there is already some pushback from commission-based advisors, as both Charles Schwab and Scottrade have agreed to, and then since backed out, from being their custodian. Currently, their custodian is Trade-PMR. I don’t think the fight is over yet, but it’s an interesting development.
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I don’t invest in mutual funds either. I didn’t realize that they charged an annual fee to invest in these. I once had an account with Legg Mason a few years back, but I don’t remember them charging me any fees. Maybe they just took money out of my account, I’m not sure. Anyway, I think I’d rather put my savings in 401k or a high yield online savings account. Everything else seems too risky nowadays.
“would normally cost you 5.75% ($575) in sales fees upfront. On top of that, since American Funds are only sold through advisors, you’re probably also paying an annual management fee of at least 1% of assets”
The extra 1% asseet based management fee (wrap fee) would be a serious compliance issue, if you are paying a wrap fee you should not have an upfront sales charge…if you pay an upfront sale charge you should not have a wrap fee. If you have both, call your brokers compliance department right away.
Dave,
The 1% asset management based fee would go to to broker and the 5.75% goes to the mutual fund family. It’s called commission.
@Bob – actually Dave is right. The 5.75% load goes to the broker. That is how the mutual fund company compensates the brokers. So a client should not be paying both. If there is a wrap or asset management fee, then the advisor should use the R or Advisor share class that American Funds offers. There is no load on those funds.
Schwab and Scottrade as well as the other big houses don’t want flat fees on mutual funds because they make a ton on their No Transaction Fee (NTF) mutual fund platform. Schwab makes 40 bps or 0.4% per year on all those funds. That is a ton of money. This is why these guys charge so much to buy a Vanguard fund that doesn’t participate on the NTF platform.
Mutual funds are a dinosaur whose time to die has come. Use ETFs or Vanguard funds.
@Dave, Kirk – Thanks for the clarification. So are there some financial planners who don’t charge anything except for the load on mutual funds they sell? Or is it that we can only by these A shares via a broker like Fidelity or Schwab?