Ever wonder why brokers sell mutual funds? Tom has a story to share about it, and that is the topic of the Mullooly Asset Management podcast this week. Tom is part of the Finance Committee for his local parish. They have a large brokerage firm that manages their investments.
The parish’s account is full of C-share (low-level load) funds, something that we have spoken about in a previous podcast. The returns on this fund have been alright, but the cost structure is expensive. If you remember, C-shares do not have an upfront charge. However, there is typically a 1% annual fee associated with them called a 12b-1 fee. So if the fund earned a net return of 9%, that means it really earned 10%. So we were wondering why brokers sell mutual funds right? Every year on the anniversary of you purchasing that fund, they are getting paid 1%.
Tom asked the brokers from this big firm why they had never considered Exchange Traded Funds as an alternative to these C-share funds. They thought that was a ridiculous request, and told Tom that, “They would have to pay a commission, and even after a discount that commission would be about 1%”.
Tom explains some interesting points about this though. The fund in question here is PTTCX, the PIMCO Total Return Fund, which coincidentally also trades as an ETF called BOND. Let’s keep in mind that with C-shares you might not pay out of pocket to own them, but you pay that 1% fee every single year you own the fund. With an ETF you pay a commission to buy and to sell, but the costs are typically lower than owning a fund. Your investment adviser should be placing your trades through a discount broker. If they are, this commission that the big firm brokers were so worried about ends up being about $10-$12. It could potentially be free.
So you still want to know why brokers sell mutual funds? Tom explains that a fee-only Investment Adviser will work to keep trading costs low for their clients. However a broker has to get paid. Brokers don’t win trips or awards for making their clients the most money. They do get recognition for generating the most revenue for their firm. Just remember that this could skew the products that a broker offers or shows to you.