Mutual Fund Industry Still Divided Over Commissions

Through more than a half century of dramatic growth, the mutual fund industry’s longest-running rivalry hasn’t changed much.

It divides the business, just about evenly, between “load” funds that impose sales commissions in one form or another, and no-loads that are sold without charge.

To some observers, the idea that loads persist in such large numbers as the 21st Century approaches seems incongruous, if not outrageous. In an era of increasing financial sophistication, they say, more and more fund investors ought to be avoiding all commission charges by going with no-load funds.

“One dictionary definition of a load is ‘a heavy burden or weight,’ ” observes Sheldon Jacobs in his annual Handbook for No-Load Fund Investors. “No investor needs such a burden.”

Yet no-load funds, by the latest tally of the Investment Company Institute in Washington, account for only about one-third of the assets under management in long-term stock and income funds.

No-loads’ share has increased only gradually since 1985, when it stood at 27.5%, and 1990, when it was a little less than 29%.

Even if you take into account money market funds and short-term municipal bond funds, which are virtually all no-load, the ranks of funds without sales charges still make up only a little more than half of the total.

Evidently, there is still a lot of truth to the industry maxim that “mutual funds are sold, not bought”--that many investors need or want a broker or salesperson to match them up with a product that suits them.

But whenever the relative merits of the two categories are discussed these days, notes Don Phillips, publisher of the Morningstar Mutual Funds reports in Chicago, the load forces seem to find themselves on the defensive.

That’s at least partly their own doing, Phillips argues. He says they haven’t stated their case effectively, and at the same time have played into their rivals’ hands with the recent widespread strategy of creating multiple classes of shares.

In a typical instance of such a setup, class A shares continue to carry a front-end sales charge of, say, 5.75%, while class B shares are sold without commission but carry a “back-end load” or charge collected when shares are redeemed.

In a few instances, class C and D shares have also been established through which sales charges are imposed via a combination of front- and back-end loads, or through some sort of annual levy on the shareholder’s account.

The load-fund forces maintain that these different classes give investors greater choice in how they wish to pay the salesperson or adviser who provides them with a service like that of a full-service stockbroker.

But Phillips doesn’t see them so favorably. “Rather than advance a positive case for financial planning,” he says, “many load-fund leaders responded to their critics by shuffling their commissions--a seeming admission that their opponents had identified a legitimate flaw in their operations.

“By embracing this path of least resistance--shifting sales charges rather than defending the merits of the added services they allow--load-fund leaders tarnish the simplicity and elegance of the mutual-fund concept, one of their product’s most appealing features.”

In complicating their merchandise, Phillips argues, load-fund sponsors are actually encouraging more investors to opt for a do-it-yourself approach in no-loads.

That’s fine for people who have the time, the desire and the knowledge they need to make good choices on their own, he says, but “it is certainly not the appropriate route for all investors.

“Indeed, the stories from large no-load houses of investors who refuse to move their individual retirement accounts out of municipal bond funds (whose tax-exempt benefits are redundant in an IRA) suggest that some investors should not be handling their own accounts.

“Perhaps if full-service groups had made a positive case for financial planning, more investors would be getting the help they need.”