Mutual Fund Commissions

 

You have heard about a particular mutualfund from a friend, saw it advertised on TV or readabout it in some publication thought it would bea good buy. Next you call your broker to get hisadvice before you buy because he is an expertand is there to help you make money.

"Hello, Billy Sol (see Billy Sol Estes onGoogle), this is Joe Mushroom and I want to buysome XYZ mutual fund. What do you think?"

"Joe, I was just thinking about you and wasgoing to call you, but first let me look up XYZfor you. Uh oh! Joe it has a high expense ratioof about 1 Ѕ per cent. I would not recommendthat for you."

Billy Sol fails to mention that XYZ has no load (that's commission) so he would not makeany money if you bought it. There are thousands ofexcellent no-load funds that outperform the loadfunds. Billy Sol says the fund his brokeragecompany recommends is ABC and again fails tomention it has a 5% load (commission) and goeson to paint a beautiful picture of ABC and howwell it has done in the past 5 and 10 yearperiod. Furthermore the expense ratio is onlyone per cent which is savings of 33%.

WOW! Joe thinks that sounds pretty good sohe lets Bill Sol buy ABC instead of XYZ. Let's seewhat really happened.

Joe saves Ѕ percent per year on the expenseratio, but pays and extra 5% up front. Maybe I'mwrong, but if you divide Ѕ% in 5% that goes 10time. In other words it is going to take JoeMushroom 10 years to makeup that 5% commissioncharge not counting what that 5% charge wouldhave made if it had been working in Joe'saccount for that 10 year period.

What it boils down to is never pay commissionfor any mutual fund. If the broker will not sellyou a no-load fund then get another broker. Heis not trying to help you make money. He istrying to make money for himself and his companyand may tell you his company does not carry aparticular fund because they don't think it is agood. Hog wash. Another broker lie. It is yourmoney and you are entitled to buy any fund. Goto a discount broker who handles that fund andopen an account. It will save you a bundle overthe years and they are as safe an any big-namebroker.

Advice from a financial planner is no better ifhe is making commissions. The smart method is tohave a fee based broker who has a winning trackrecord. Have any financial planner show you hismodel account. He should have one or maybeseveral model portfolios. Unless they make moneyevery year he is not a successful money advisor. Don't let them hoodwink you about theirperformance "is better than the S&P500". That'snonsense. You want to see a cash increase everyyear.

The first and basic rule is never paycommissions for any mutual fund.

Copyright 2005

 



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