The contrarian thinker: Financial literacy

Community Columnist

Basic mutual fund fees. Learn them or lose money.

How can three investors all own the exact same investments yet all have different returns?

As with so many things, the devil is in the details.

First, there’s the detail of “share class.” The same mutual fund investments can be the same, but the amount you are paying will vary based on the “share class” (A-F) your adviser recommends.

Second, you must know the two separate fees: “sales load” and “expense ratio.”

—Sales Loads are the commission paid to the broker and associated brokerage for selecting the mutual fund for an investor. If you own “Share Class A,” you pay front load charges when you buy the mutual fund that can range from 1 percent up to 8 percent. With “Share Class B” you pay back end loads when you sell. With “Share Class C” you generally pay no front-end sales load and pay back end load that gets lower the longer you hold the fund. Consequently, the “net expense ratio” on C shares is usually higher to compensate for the lower sales loads.

—Net Expense Ratio is a separate fee covering administrative fees associated with managing and marketing the fund. A sub category is the 12b-1 fees paid to brokers/brokerage for “marketing” the fund. The “net expense ratio” is a fee brokers receive for selling the fund to investors which is separate from any “sales load” compensation received.

All funds have an expense ratio, but some don’t have a sales load. These are known as “no load” funds. Obviously, “no load” means lower cost to you and higher mutual fund returns assuming the only difference is the fund share class.

Funds with sales loads are used by two kinds of advisers: Fee-based advisers compensated by both direct fees and commissions, and commission based professionals are compensated via commissions only. (This was a topic in my earlier column on fiduciary responsibilities.).

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