Schwab Ditches Funds With Sales Charges


Imagine a vendor gave you a streaming TV service that offers the exact same movies and TV shows as Netflix, at the same monthly cost. The only difference: you have to pay a $ 100 registration fee to register.

It's hard to imagine anyone accepting the competitor's deal. Yet, many investors have acted the same way for years by purchasing fee-based mutual funds instead of no-fee alternatives.

When the first modern mutual funds arrived in the 1920s, load funds were the only type of funds available. Investors paid a fee to a broker or other intermediary in order to be able to invest. But nowadays there are plenty of no-load alternatives to choose from. In addition, historical data does not show any substantial difference in performance between funds with and without fees; in fact, Morningstar has found that no-load funds have had a slightly better track record in recent years.

More and more investors now realize that paying more for an investment doesn't mean the investment is better. The most recent evidence comes in the form of Charles Schwab's announcement that he will stop selling classes of mutual fund shares that carry selling charges.

As reported by the Wall Street Journal, Schwab will no longer be offering share classes with charges to clients, although clients who already own shares in these funds may continue to hold them at Schwab. "It's a low-volume business that no longer makes sense for us to administer," a company spokesperson told The Journal. (1)

The numbers support Schwab's assessment. According to the Investment Company Institute, a mutual fund trading group, investors withdrew more than $ 500 billion from stock classes with charges between 2010 and 2014; During the same period, they invested $ 1.34 trillion in no-load classes. Many mutual fund companies offer funds that would normally bear charges to retail investors on an exempt basis, which makes it even more illogical for investors to pay for something they can get for free. Schwab's decision is always a sign of things to come in the mutual fund market.

This trend predates the Ministry of Labor's new fiduciary rules, but requiring a broader range of finance professionals to put the financial well-being of clients first will certainly accelerate the demise of load funds. Schwab has been adamant that the new labor rule is not the direct catalyst for his decision, but that the changing standards could contribute to similar decisions by other companies down the line.

Some mutual fund companies may also drop certain classes of stocks as more investors become savvy enough to avoid them. One company, Waddell & Reed, said in February that it would merge Class A shares – which charge a charge up front – into institutional stocks, which typically charge no charge and offer expense ratios lower. Other mutual funds will likely continue to offer stocks that include loads, if only to take advantage of the few investors who don't realize they might get a better deal elsewhere.

Paid-only financial advisers and other professionals who do not benefit from commissions on individual investment products have long kept their clients away from load funds. Mutual fund companies introduced back-end and level-load funds in large part because some investors had started to resist paying a commission up front, but the fact remains. that there is no good reason to pay a broker 5% or more in order to invest, no matter when you pay it.

If Schwab's customers still bought load fund shares in substantial numbers, you can be sure that Schwab would be happy to continue offering them, at least in taxable accounts. Schwab's decision to shut down its load fund business is a sign that too many investors have figured out that load funds are a bad deal.


1) The Wall Street Journal, "Charles Schwab stops selling mutual funds"

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