In the last week or so, I’ve read several articles about the downfall of A share mutual funds. If you don’t know what an A share mutual fund is, Tom and I have discussed A, B, and C share mutual funds in a previous podcast that you can check out here: https://mullooly.net/understanding-c-shares-what-you-need-to-know/7368 To briefly summarize the A share mutual fund: they typically charge a front-end sales load between 4-6%. This means a portion of the money you pay to own the mutual fund isn’t getting invested. Instead, it pays a commission to the broker who sold it to you and their firm. While they profit, you begin your investment in this fund already down 4-6%. Hopefully this isn’t news to you!
The fact that fewer of these funds are being sold to investors is something to celebrate, in my opinion. Here at Mullooly Asset Management we invest in no-load mutual funds and ETF’s. We’re fiduciary investment advisors and never make a sales commission off any financial advice we give to our clients. We believe that commissions create an inherent conflict of interest when it comes to investment advice. Example: “Why yes, Mr. and Mrs. Jones you should buy this A share mutual fund that will pay me 5%, instead of a no-load mutual fund that will accomplish the same investment objective.” It probably won’t be phrased quite so plainly, but you get the point.
Kris Venne, a CFP with Ritholtz Wealth Management recently wrote a post about A share mutual funds where he asked:
“Would someone please explain to me why financial advisors are still selling their clients A share mutual funds? How do these things even exist anymore?”
His feelings pretty accurately represent mine as well. Seeing accounts loaded up in A and C share mutual funds makes me sick. There are no-load funds out there that will provide them with a similar, if not identical, strategy for a lower cost.
An Investment News article recently shared some data on outflow from mutual fund A shares:
“Outflows totaled $122 billion over the first 10 months of the year, Morningstar Inc. estimates. If that figure holds, it could be the worst year ever for that share class, topping the nearly $88 billion in redemptions during 2011. Morningstar started tracking the data in 1993.”
Personally I think what could be the “worst year ever” for mutual fund A shares is one of the best possible things for investors. Hopefully this data means more investors are becoming aware of the high commissions being paid to brokers every year. Commissions that are eating away at their investment returns. It seems like we’re trending in the right direction here.
Sources:
http://krisvenne.tumblr.com/post/102895334120/zombie-investment-1-the-a-share-mutual-fund
http://www.finra.org/web/groups/investors/@inv/@protect/@ia/documents/investors/p125866.pdf