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For Some, the Best Advice Is to Pay for It

April 21, 1996|RUSS WILES | RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds

The mutual fund sales charge--the "load"--is increasingly irrelevant.

Of course, investors still pay for the privilege of a managed investment portfolio. Fees of various kinds still handsomely support the mutual fund industry. But loads, primarily commissions for a broker or financial planner who advises the investor, are less common and lower than they used to be.

"The distinction between no-load and load funds is blurring," said David C. Conine, director of mutual-fund marketing at Merrill Lynch, during a conference last month in San Diego sponsored by the Federal Bar Assn. and the Investment Company Institute.

You can now buy traditional load portfolios without paying sales charges and you can purchase mainstream no-load funds from a broker.

Now, you may pay for advice separately. The new model for the fund business is "advice vs. doing it yourself," said James B. Hawkes, executive vice president of the Eaton Vance fund group in Boston.

It wasn't always like this. As recently as the 1980s, front-end sales charges as high as 8.5% were still common. Even portfolios from the Vanguard Group--now the largest, pure no-load family--were sold with commissions attached as late as 1977.

Today, maximum loads above 5.75% are rare. Most load funds now also offer various share classes, giving investors a choice of commission structures. Share classes were devised largely to help investors bypass a front-end charge entirely, though they still face other fees.

Meanwhile, fee-based advisory programs are proliferating. These programs come in various shapes and sizes, but a common thread is that investors receive mutual-fund help from a middleman and don't pay any loads for the privilege. Instead, they pay for this advice in the form of fees ranging from 0.25% to 1.5% or so each year.

The shift away from sales charges on mutual funds is being driven by several factors.

One is that the media (and no-load funds) spend a lot of time arguing that load funds are a bad deal. Also, investors have become averse to sales charges because they see such charges are waived in their employer-sponsored 401(k) plans.

But people still want advice to sort through all the choices. Fee-based advisory arrangements typically are built around an asset-allocation framework and include financial-planning help that investors probably wouldn't get on their own.

Numerous brokers and financial planners have embraced the fee-for-advice concept, as it makes their services more palatable to a wider audience and steadies their income during slack periods.

The number of fee-based brokers and financial planners has exploded in recent years, and even a few no-load firms such as Fidelity Investments in Boston, Dreyfus Corp. in New York, Stein Roe in Chicago and Strong Investments of Milwaukee now provide mutual-fund recommendations for a fee.

Ironically, long-term investors are often better off paying a single front-end sales charge rather than smaller but ongoing fees. But many people prefer the latter approach because it involves smaller upfront commissions, or none at all.

In addition, a fee arrangement makes the broker or financial planner more directly accountable and improves the odds that he or she will be around to provide ongoing help for the investor.

"People don't mind paying for advice, but they don't want to pay for it in the form of a sales charge," said Stanley Egener, president of the Neuberger & Berman fund group in New York.

Because the fees charged for mutual-fund clients can be quite low--often less than 1% a year--advisors typically won't work with investors with less than $100,000 or so in portfolio assets.

During the next bear market, it's possible that even more investors will discover that they need help managing their mutual funds. Advisors really earn their keep if they can persuade people to stay the course when things look bleakest.

Then again, bear markets also are the times when fees can be especially hard to justify. Customers may discover that they can lose money on their own, without having to pay a fee for the privilege.

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