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In this highlight, we discuss if front-end load fees are a bad thing or a good thing and how you should approach them.
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Jacob has a question for you guys. He said, “I’d like to hear the money guy’s opinion on mutual funds with front-end load fees. Is it a red flag if an advisor wants to put you in these? Yes, is it a red flag?”
So, what is Jacob talking about? A lot of mutual funds, when you buy them from an advisor, might be what are called loaded funds. A lot of them are A-shares, which means they are loaded on the front end. So, if you want to buy $100 of this fund, the first 3% to 5% commission will go to the advisor right off the top. You pay a front-end commission to do that.
Here’s the ultimate question I’d ask Jacob: “Why am I buying a commissioned fund?” And, by the way, commission funds come in all types. They are the front-end loaded ones, there are also back-end loaded ones, and there are some that are just loaded every single year. So, you want to make sure you understand what you’re buying. I would make the argument that, whatever that fund is, there are probably some options available to you that are much less expensive, both from a commission standpoint as well as from an ongoing internal expense standpoint. So, the question that Jacob asks is, “If the advisor is recommending that, I’d ask the question, ‘Why are you recommending this share class of this fund, as opposed to this Index Fund that’s no-load, yada yada?'” What would you say to that?
I always like to give experience shares because I think you have to be careful because a lot of people, I think, are like me when I was in my early 20s. I had graduated with an accounting degree, and I was working in public accounting. I just read The Millionaire Next Door and The Wealthy Barber. I was on fire for this concept of personal finance and building wealth that my parents had not been able to build. I wanted to start making the money work, so I didn’t know where to start. Fortunately, there was a CPA at my firm whose roommate was selling mutual funds and other things, so I bought the Regional Bank fund from John Hancock Class B and then the John Hancock special equities Class B.
As you can see, I didn’t know what I was doing. But, here’s the thing. Even though those were inappropriate products, and the reason why is because Class B, you never see these things anymore, they tried to mimic index funds or no-load funds in the fact they had no front-end commissions, but they would ding you up to 6% if you sold it on the back end. So, think about all that compound and growth of the ’90s, and then somebody gets to take 5% to 6%, depending upon how many years you held it. But, that’s not where the bad stopped. They also had an internal expense ratio on a lot of these of over 2.5%, insane because, if you think about now with index funds being basically free, that’s 2.5% of performance every year you have to recapture just to catch where the market is.
So, here’s my point. I wouldn’t have become the financial mutant who has created all this without something starting the cast and rolling the ball forward, of lighting the fire of my curiosity. So, I’m not mad at the person that sold me that, but I so that’s why the first thing I was going to say is, “Know thyself.” That was the thing that I didn’t know any better. So, there was actually value added to me by that salesperson because he got the ball started to where I wanted to move to step two, which is why I started doing my homework. I started researching, and now that’s what I was going to say. The third point is, has the modern world solved your problem of researching? The fact that you can watch content like The Money Guy Show and other people like that, where we will load you up with free information on all these new products because Vanguard, like I when I, for if you go back in our archives, I guarantee you there’s a show when I first started talking about index funds to the public.
Guys, it was not the majority of people invested in index funds. It was actually active managers, and active managers were usually sold by wholesalers and then commissioned agents who had a share b share C shares and so forth, all the alphabet soup. Now that’s different. The majority of people are buying index funds as their investment, so the world in the market has shifted. You’ve got to do your homework. We can’t make specific recommendations to you. This is an education show; it’s not a show where we tell you what to do because that would be inappropriate since we’re licensed people. But I do think the modern world has created a lot of opportunity for you to do your own due diligence so you can figure out who you are, what you need, and then is there an index fund, is there a low-cost provider because Vanguard, Fidelity, Charles Schwab, and they’re all-in solutions have really opened up the world a lot differently. But that doesn’t mean that there’s not going to be some commissioned person that didn’t get your journey started, so I guess I’m a little more graceful. That’s what you make a great point because I think it’s important. Just because someone recommends a commissioned product or someone tries to sell you an insurance policy does not mean that that person is a bad person. At the end of the day, no one’s going to care about your money more than you care about your money, so you have to be the educated consumer. Don’t just assume because someone’s recommending that for you that they don’t have your best intention at heart. They just may not know.
At the beginning of my career, I started on the insurance commission side of things, and that’s all that I knew. Everything that seemed like an appropriate solution until I became educated until I actually figured out that there was more out there, where better solutions out there. So you have to be an advocate for yourself. If we’re really cool with our editing skills, maybe in a highlight, we could put this.
I watched a great short over the weekend, and I thought it was hilarious because it will play this where they said the difference between cuts and construction between a framer, and they showed somebody who basically used their hand as the ruler and then sliced that ripped it through with a saw, and it had an angle and stuff. Then they did a trim specialist, and they had somebody actually take a ruler, and then they dropped the saw down because trim or go do angles, and they’re gonna be so exact. Then they had Furniture maker, and they had the band, you know, the saw that you push out on the table saw and had really good lines on that. I thought this is exactly what you just described is that that person because a lot of insurance agents, a lot of commissioned people, they’re only going to sell what they know. That’s why it’s up to you to go educate yourself so you know if they actually got the tools in their tool belt that’s actually going to give you the best product for your financial life. And it just made me think of that because it just entertained me how the same problem can be solved three different ways and you get three different results so it’s on you to kind of know what’s out there so you can maximize it.
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