Explaining impact of front loads and fees on returns to sister

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
supersharpie
Posts: 648
Joined: Wed Dec 22, 2010 1:28 pm

Explaining impact of front loads and fees on returns to sister

Post by supersharpie » Fri Jan 13, 2017 10:46 am

My sister has been investing for several years but has taken a hands off approach to this point. She presently has an advisor/broker handling her Roth IRA to which she is contributing $100 a month. All of her Roth investments are in ABALX. Based on my research this carries a 5.75% front load and a 0.58% ER.

Let me know if my math is right.

Currently each month $6.33 of her investment goes directly to fees and she keeps only $93.67. This means that in order to break even the fund must gain 6.75%.

If she instead invested in the Wellington Fund she would only pay the 0.26% ER, effectively investing an extra $6.07 per month.

If this is accurate I am tempted to recommend that she cut ties with her advisor and start handling her own investments through a low cost brokerage like Vanguard or Fidelity.

dbr
Posts: 26562
Joined: Sun Mar 04, 2007 9:50 am

Re: Explaining impact of front loads and fees on returns to sister

Post by dbr » Fri Jan 13, 2017 11:05 am

supersharpie wrote:My sister has been investing for several years but has taken a hands off approach to this point. She presently has an advisor/broker handling her Roth IRA to which she is contributing $100 a month. All of her Roth investments are in ABALX. Based on my research this carries a 5.75% front load and a 0.58% ER.

Let me know if my math is right.

Currently each month $6.33 of her investment goes directly to fees and she keeps only $93.67. This means that in order to break even the fund must gain 6.75%.

If she instead invested in the Wellington Fund she would only pay the 0.26% ER, effectively investing an extra $6.07 per month.

If this is accurate I am tempted to recommend that she cut ties with her advisor and start handling her own investments through a low cost brokerage like Vanguard or Fidelity.
No, that isn't how a load works. What actually happened is that when she bought the investment she gave them $100 and they bought $94.25 worth of securities and stole* $5.75 for themselves that very day. Since then they have been taking $0.58 out of the fund every year. If she had invested in the Wellington fund she would have bought $100 worth of securities and the fund would be taking out $0.26 every year. Generally American Funds are not bad funds and not hugely more expensive than Vanguard, although some of us might set the upper limit that a person should be paying at perhaps 0.10% (meaning Wellington is too expensive).

*I use the word stole, but in reality this is simply paying the advisor to be in business. If someone wants an advisor, they are going to have to pay for it. Why someone would want an advisor and pay for it is a different question.

supersharpie
Posts: 648
Joined: Wed Dec 22, 2010 1:28 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by supersharpie » Fri Jan 13, 2017 11:10 am

dbr wrote:
supersharpie wrote:My sister has been investing for several years but has taken a hands off approach to this point. She presently has an advisor/broker handling her Roth IRA to which she is contributing $100 a month. All of her Roth investments are in ABALX. Based on my research this carries a 5.75% front load and a 0.58% ER.

Let me know if my math is right.

Currently each month $6.33 of her investment goes directly to fees and she keeps only $93.67. This means that in order to break even the fund must gain 6.75%.

If she instead invested in the Wellington Fund she would only pay the 0.26% ER, effectively investing an extra $6.07 per month.

If this is accurate I am tempted to recommend that she cut ties with her advisor and start handling her own investments through a low cost brokerage like Vanguard or Fidelity.
No, that isn't how a load works. What actually happened is that when she bought the investment she gave them $100 and they bought $94.25 worth of securities and stole* $5.75 for themselves that very day. Since then they have been taking $0.58 out of the fund every year. If she had invested in the Wellington fund she would have bought $100 worth of securities and the fund would be taking out $0.26 every year. Generally American Funds are not bad funds and not hugely more expensive than Vanguard, although some of us might set the upper limit that a person should be paying at perhaps 0.10% (meaning Wellington is too expensive).

*I use the word stole, but in reality this is simply paying the advisor to be in business. If someone wants an advisor, they are going to have to pay for it. Why someone would want an advisor and pay for it is a different question.
Ahh...so you only pay the load out of your initial investment, but not any subsequent contributions to the same fund?

dbr
Posts: 26562
Joined: Sun Mar 04, 2007 9:50 am

Re: Explaining impact of front loads and fees on returns to sister

Post by dbr » Fri Jan 13, 2017 11:16 am

supersharpie wrote:
dbr wrote:
supersharpie wrote:My sister has been investing for several years but has taken a hands off approach to this point. She presently has an advisor/broker handling her Roth IRA to which she is contributing $100 a month. All of her Roth investments are in ABALX. Based on my research this carries a 5.75% front load and a 0.58% ER.

Let me know if my math is right.

Currently each month $6.33 of her investment goes directly to fees and she keeps only $93.67. This means that in order to break even the fund must gain 6.75%.

If she instead invested in the Wellington Fund she would only pay the 0.26% ER, effectively investing an extra $6.07 per month.

If this is accurate I am tempted to recommend that she cut ties with her advisor and start handling her own investments through a low cost brokerage like Vanguard or Fidelity.
No, that isn't how a load works. What actually happened is that when she bought the investment she gave them $100 and they bought $94.25 worth of securities and stole* $5.75 for themselves that very day. Since then they have been taking $0.58 out of the fund every year. If she had invested in the Wellington fund she would have bought $100 worth of securities and the fund would be taking out $0.26 every year. Generally American Funds are not bad funds and not hugely more expensive than Vanguard, although some of us might set the upper limit that a person should be paying at perhaps 0.10% (meaning Wellington is too expensive).

*I use the word stole, but in reality this is simply paying the advisor to be in business. If someone wants an advisor, they are going to have to pay for it. Why someone would want an advisor and pay for it is a different question.
Ahh...so you only pay the load out of your initial investment, but not any subsequent contributions to the same fund?
No, it is every contribution, but it is only once and not every year on all of it. You had a load being charged every year. I don't think they take a load out of reinvesting dividends, however. It might be a good exercise for your sister to call the advisor and ask for an explanation. Another thing that can be done is to look at a monthly statement and see what value in shares were actually bought for that $100 contribution. They won't show $5.75 deducted from the account but they will show $94.75 worth of shares bought instead of $100 in shares bought.

There is this: https://www.americanfunds.com/individua ... icing.html

Atgard
Posts: 346
Joined: Wed Apr 09, 2014 2:02 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by Atgard » Fri Jan 13, 2017 11:40 am

I think you have the math right on the load (they take the 5.75% right off the top of any contribution you make, every time), but not quite on the ER (it is taken pro rata from the total value of the fund every year). So they don't take out $6.33 up front, they take out $5.75 up front (one time fee) and another 0.58% of the total value of the fund ($0.58 if the fund is worth $100) over the course of a year, every year.

In other words, if she invests $100 and the fund stays at a value of $1 per share (no increase or decrease in value), her statements would be:

Day 1: $94.25
End of Year 1: $93.70 (minus 0.58% of total value, or the above number x .9942)
End of Year 2: $93.16
Etc.

You basically have the general idea right though, she is getting ripped off. While the ER is high but not absurd (some are 1-2% or more), there are many lower ones out there (0.05% to 0.25%). But there are many no-load funds or ETFs that avoid the 5.75% entirely, that is where she's really getting killed.

dbr
Posts: 26562
Joined: Sun Mar 04, 2007 9:50 am

Re: Explaining impact of front loads and fees on returns to sister

Post by dbr » Fri Jan 13, 2017 11:59 am

Atgard wrote:I think you have the math right on the load (they take the 5.75% right off the top of any contribution you make, every time), but not quite on the ER (it is taken pro rata from the total value of the fund every year). So they don't take out $6.33 up front, they take out $5.75 up front (one time fee) and another 0.58% of the total value of the fund ($0.58 if the fund is worth $100) over the course of a year, every year.

In other words, if she invests $100 and the fund stays at a value of $1 per share (no increase or decrease in value), her statements would be:

Day 1: $94.25
End of Year 1: $93.70 (minus 0.58% of total value, or the above number x .9942)
End of Year 2: $93.16
Etc.

You basically have the general idea right though, she is getting ripped off. While the ER is high but not absurd (some are 1-2% or more), there are many lower ones out there (0.05% to 0.25%). But there are many no-load funds or ETFs that avoid the 5.75% entirely, that is where she's really getting killed.
Yes, your explanation is more complete and accurate on the details. Thanks (though directed to the OP).

I do think even though I call front loads "stealing" that there is still a lesson here that people can hardly expect someone to spend time on an account with them without being paid. The lesson is that if you have an advisor and the service is free, you had better start looking harder.

supersharpie
Posts: 648
Joined: Wed Dec 22, 2010 1:28 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by supersharpie » Fri Jan 13, 2017 12:27 pm

This is much appreciated. I don't want to get overly involved in her affairs; she is a bright adult. However, I do want to enhance her level of financial literacy. She apparently has been operating under the assumption that the advisor has been providing his services for a miniscule flat fee. She also was ignorant of the concept of ERs.

User avatar
jimb_fromATL
Posts: 2193
Joined: Sun Nov 10, 2013 12:00 pm
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Explaining impact of front loads and fees on returns to sister

Post by jimb_fromATL » Fri Jan 13, 2017 12:35 pm

You'd need to see some actual statements of her account before you can make a good argument against ABALX.

A lot of funds waive the front-load fees for retirement accounts anyway, and according to Yahoo data for load-adjusted returns, there's very little difference between VWELX and AVALX. In fact depending on the length of time, ABALX may even have done a few dollars better recently.

Using yearly load-adjusted performance data from Yahoo.com
  • The geometric mean -- or CAGR (Compound Annual Growth Rate) -- for ABALX for a single lump sum for 10 years has been 6.52%. A lump sum of $10,000 would have grown to $18,802. This is a common report you see when comparing the performance of various funds on the financial websites.

    Perhaps more meaningful for investing periodically such as in an IRA or 401(k), the average APY ( CAGR) for dollar-cost-averaging (DCA) with periodic investments has been 8.66%. Investing $1,200 at the beginning of each year would give you $19,494 for your average of $1200.

    IMO most folks investing for retirement should be more interested in the average annual return and end result for DCA with periodic investments spread out over the 10 years instead of the result for a single lump sum that was invested 10 years ago.


Here's how VWELX and some other funds performed with the same parameters. Again, geomean is the compound annual growth rate for a lump sum, and the DCA rate is for yearly periodic investments, where the ups and downs of the market can make a lot of difference depending on when you started the investment.

ABALX 5yr: geomean= 10.822%; $10,000 5 years = $16,716. DCA rate= 9.029%; $1200/yr 5yr = $7,835.
VWELX 5yr: geomean= 10.442%; $10,000 5 years = $16,431. DCA rate= 9.106%; $1200/yr 5yr = $7,852.
VFINX 5yr: geomean= 14.493%; $10,000 5 years = $19,674. DCA rate= 12.42%; $1200/yr 5yr = $8,642.
VWINX 5yr: geomean= 7.432%; $10,000 5 years = $14,311. DCA rate= 6.771%; $1200/yr 5yr = $7,335.

ABALX 10yr: geomean= 6.518%; $10,000 10 years = $18,802. DCA rate= 8.662%; $1200/yr 10yr = $19,494.
VWELX 10yr: geomean= 6.892%; $10,000 10 years = $19,474. DCA rate= 8.615%; $1200/yr 10yr = $19,441.
VFINX 10yr: geomean= 6.826%; $10,000 10 years = $19,355. DCA rate= 10.657%; $1200/yr 10yr = $21,841.
VWINX 10yr: geomean= 6.728%; $10,000 10 years = $19,178. DCA rate= 7.45%; $1200/yr 10yr = $18,198.

ABALX 15yr: geomean= 6.894%; $10,000 15 years = $27,182. DCA rate= 7.67%; $1200/yr 15yr = $34,193.
VWELX 15yr: geomean= 7.572%; $10,000 15 years = $29,889. DCA rate= 8.142%; $1200/yr 15yr = $35,628.
VFINX 15yr: geomean= 6.571%; $10,000 15 years = $25,978. DCA rate= 8.752%; $1200/yr 15yr = $37,579.
VWINX 15yr: geomean= 6.914%; $10,000 15 years = $27,259. DCA rate= 7.139%; $1200/yr 15yr = $32,657.

ABALX 20yr: geomean= 8.093%; $10,000 20 years = $47,422. DCA rate= 7.585%; $1200/yr 20yr = $56,434.
VWELX 20yr: geomean= 8.333%; $10,000 20 years = $49,570. DCA rate= 7.896%; $1200/yr 20yr = $58,573.
VFINX 20yr: geomean= 7.579%; $10,000 20 years = $43,108. DCA rate= 7.353%; $1200/yr 20yr = $54,892.
VWINX 20yr: geomean= 7.667%; $10,000 20 years = $43,820. DCA rate= 7.183%; $1200/yr 20yr = $53,796.



jimb

User avatar
Earl Lemongrab
Posts: 4326
Joined: Tue Jun 10, 2014 1:14 am

Re: Explaining impact of front loads and fees on returns to sister

Post by Earl Lemongrab » Fri Jan 13, 2017 3:23 pm

It's like beginning a 100-yard dash fifteen feet behind the starting line.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

livesoft
Posts: 60419
Joined: Thu Mar 01, 2007 8:00 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by livesoft » Fri Jan 13, 2017 3:31 pm

dbr wrote: Another thing that can be done is to look at a monthly statement and see what value in shares were actually bought for that $100 contribution. They won't show $5.75 deducted from the account but they will show $94.75 worth of shares bought instead of $100 in shares bought.
I think the statement will show $100 in shares bought, but will have a different price for the shares than found outside the statement.

For instance, yesterday, ABALX had a reported NAV of $25.07 per share. If one bought yesterday and pay a 5.75% front-end load, then one would have bought $94.25/$25.07 per share = 3.759 shares. The statement would show 3.759 shares purchased for $100 and the share price on the statement would be $100/3.759 = $26.60 per share. A statement could even not show the higher $26.60 price by not showing any price. In any event, the load will not be shown on the statement.

So just looking at the statement would not give one a sense that the front-end load was being paid. It's like going to a store and being told that the prices shown on the price tags are not the price you pay. You pay a price 6.10% higher than the price show on the price tag. Call it a stupid tax if you like.
Last edited by livesoft on Fri Jan 13, 2017 3:36 pm, edited 2 times in total.
Wiki This signature message sponsored by sscritic: Learn to fish.

mhalley
Posts: 5667
Joined: Tue Nov 20, 2007 6:02 am

Re: Explaining impact of front loads and fees on returns to sister

Post by mhalley » Fri Jan 13, 2017 3:33 pm

These are the fees for the fund. Does the advisor charge any fees on top of these?

supersharpie
Posts: 648
Joined: Wed Dec 22, 2010 1:28 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by supersharpie » Fri Jan 13, 2017 3:34 pm

mhalley wrote:These are the fees for the fund. Does the advisor charge any fees on top of these?
Good question, I asked her to inquire w/ the advisor.

dbr
Posts: 26562
Joined: Sun Mar 04, 2007 9:50 am

Re: Explaining impact of front loads and fees on returns to sister

Post by dbr » Fri Jan 13, 2017 5:57 pm

livesoft wrote:
dbr wrote: Another thing that can be done is to look at a monthly statement and see what value in shares were actually bought for that $100 contribution. They won't show $5.75 deducted from the account but they will show $94.75 worth of shares bought instead of $100 in shares bought.
I think the statement will show $100 in shares bought, but will have a different price for the shares than found outside the statement.

For instance, yesterday, ABALX had a reported NAV of $25.07 per share. If one bought yesterday and pay a 5.75% front-end load, then one would have bought $94.25/$25.07 per share = 3.759 shares. The statement would show 3.759 shares purchased for $100 and the share price on the statement would be $100/3.759 = $26.60 per share. A statement could even not show the higher $26.60 price by not showing any price. In any event, the load will not be shown on the statement.

So just looking at the statement would not give one a sense that the front-end load was being paid. It's like going to a store and being told that the prices shown on the price tags are not the price you pay. You pay a price 6.10% higher than the price show on the price tag. Call it a stupid tax if you like.
That's interesting. I would be curious to know from people buying shares with loads exactly what their statements show. I was definitely under the impression one would see the load "gone missing" explicitly.

dbr
Posts: 26562
Joined: Sun Mar 04, 2007 9:50 am

Re: Explaining impact of front loads and fees on returns to sister

Post by dbr » Fri Jan 13, 2017 6:26 pm

livesoft wrote: For instance, yesterday, ABALX had a reported NAV of $25.07 per share. If one bought yesterday and pay a 5.75% front-end load, then one would have bought $94.25/$25.07 per share = 3.759 shares. The statement would show 3.759 shares purchased for $100 and the share price on the statement would be $100/3.759 = $26.60 per share. A statement could even not show the higher $26.60 price by not showing any price. In any event, the load will not be shown on the statement.
So the point would be that they would show $100 invested but they would short you on the number of shares. So now, if one asked for the cost basis, I guess it would also still be true that the basis would be $100 because investment costs can be rolled into the basis, and you still would not know. Is it legit to report basis to the IRS with the load already rolled in?

livesoft
Posts: 60419
Joined: Thu Mar 01, 2007 8:00 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by livesoft » Fri Jan 13, 2017 6:36 pm

dbr wrote:Is it legit to report basis to the IRS with the load already rolled in?
Of course. That's how stocks and ETFs report basis: With commissions already rolled in.
Wiki This signature message sponsored by sscritic: Learn to fish.

Atgard
Posts: 346
Joined: Wed Apr 09, 2014 2:02 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by Atgard » Fri Jan 13, 2017 10:36 pm

If they explicitly told people they were stealing 6% of everything right off the bat, WAY more people would be investing at Vanguard.

I agree, they will do anything they can to avoid showing how much you're paying. Not one person I've ever met who used an overpriced brokerage could ever figure out what they were paying in fees from their statements. Not ER, not loads. Maybe the AUM fee would be included, that's harder to hide.

Nate79
Posts: 2319
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

Re: Explaining impact of front loads and fees on returns to sister

Post by Nate79 » Fri Jan 13, 2017 11:12 pm

Just a reminder that when looking at returns on sites like M* front load and any advisor fees are not included.

sport
Posts: 6705
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Explaining impact of front loads and fees on returns to sister

Post by sport » Fri Jan 13, 2017 11:16 pm

dbr wrote:That's interesting. I would be curious to know from people buying shares with loads exactly what their statements show. I was definitely under the impression one would see the load "gone missing" explicitly.
Many years ago, I bought a load fund before I knew any better. Back then, the load was (gasp) 8.75%. It was a Fidelity fund.
When I sent in $100, my statement showed a purchase of $91.25. The share prices was the same as that found in the newspaper.

I did not mind paying the load on the initial purchase. I understood that the advisor had to be paid for recommending a suitable fund. However, I objected to paying the advisor more every time I made an additional purchase and the advisor was not doing anything more for me. I just cut the coupon off the previous confirmation statement and mailed it in with a check. So, I researched the differences between load and no load funds. I learned that the only real difference was the load. So, I moved to a no load fund company for my investing.

Dottie57
Posts: 3277
Joined: Thu May 19, 2016 5:43 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by Dottie57 » Sat Jan 14, 2017 8:31 am

livesoft wrote:
dbr wrote: Another thing that can be done is to look at a monthly statement and see what value in shares were actually bought for that $100 contribution. They won't show $5.75 deducted from the account but they will show $94.75 worth of shares bought instead of $100 in shares bought.
I think the statement will show $100 in shares bought, but will have a different price for the shares than found outside the statement.

For instance, yesterday, ABALX had a reported NAV of $25.07 per share. If one bought yesterday and pay a 5.75% front-end load, then one would have bought $94.25/$25.07 per share = 3.759 shares. The statement would show 3.759 shares purchased for $100 and the share price on the statement would be $100/3.759 = $26.60 per share. A statement could even not show the higher $26.60 price by not showing any price. In any event, the load will not be shown on the statement.

So just looking at the statement would not give one a sense that the front-end load was being paid. It's like going to a store and being told that the prices shown on the price tags are not the price you pay. You pay a price 6.10% higher than the price show on the price tag. Call it a stupid tax if you like.

This type of change should be illegal.

User avatar
BL
Posts: 7945
Joined: Sun Mar 01, 2009 2:28 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by BL » Sat Jan 14, 2017 10:20 am

Perhaps this free pdf by Dr William Bernstein would be helpful in many ways (especially Hurdle # 5 about advisors/salespersons):
https://www.etf.com/docs/IfYouCan.pdf

If You Can is also available for purchase in print or e-book form at Amazon.

Check the ticker on Morningstar and select Expense tab.The % load is given. The ER contains a 12b-1 kickback to broker of about 0.25%/year for Class A funds (load). Other classes may have larger ERs with 1.0% 12b-1 kickbacks.

radiowave
Posts: 1656
Joined: Thu Apr 30, 2015 5:01 pm

Re: Explaining impact of front loads and fees on returns to sister

Post by radiowave » Sat Jan 14, 2017 10:32 am

Atgard wrote:If they explicitly told people they were stealing 6% of everything right off the bat, WAY more people would be investing at Vanguard.

I agree, they will do anything they can to avoid showing how much you're paying. Not one person I've ever met who used an overpriced brokerage could ever figure out what they were paying in fees from their statements. Not ER, not loads. Maybe the AUM fee would be included, that's harder to hide.
Maybe we should call it embezzlement?
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

Post Reply