Advice for friend - lots of loads and high ER yet good returns

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CompoundedInterest
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Advice for friend - lots of loads and high ER yet good returns

Post by CompoundedInterest » Sun Oct 20, 2019 7:16 am

I took a look at a friend's portfolio and would appreciate some feedback as the situation is not clear-cut and I don't have experience with loaded funds.

Specifically, he has a full array of MFS mutual funds. Each has 5.75% front-loads plus pretty high ER. The funds are:
MEIAX, ER 0.83%
MFEGX, 0.92%
MGIAX, 0.98%
MNDAX, 1.32%
MTCAX, 1.23%

My knee-jerk at first glance was to advise selling them all, going to something sane with no loads and reasonable ERs. However, the performance (when viewed through Portfolio Visualizer) is quite good -- outperforming the SP500 by about a percentage point for multi-year periods -- so he didn't get absolutely soaked in terms of performance, even accounting for all the fee drag.

A few Q's:
* How does one handle rebalancing with loaded funds? Does that load get charged when a portion is sold of one fund and used to buy another loaded fund? Any "in-family" fee waived if you, say, go from one MFS fund to another for purposes of rebalancing. (I fear the answer here is yes, loads are paid again, as he described the advisor calling up a few years ago and switching him out of an underperforming MFS fund and into another, paying the load again.)

* The ER on these funds are quite large by themselves. I thought the appeal to pay upfront loads was for lower fees later -- but these ERs along are high enough that I wouldn't consider the funds even if they were no-load. Are these ERs truly being charged on top of the load? If so, it's a miracle the investment has performed as well as it has.

* Does the advisor typically charge a % AUM on top of these loads and ERs? Surely not, I hope.

My thought it to tell my friend to at least stop contributing to these funds (and paying 5.75% with each contribution), track them side by side with portfolio under his own control and direct new contributions there, prove to himself he can do better, then when comfortable roll-over everything and just treat the loads already paid as the sunk costs that they are. Sound advice -- or -- differing opinions on what to do?

HomeStretch
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by HomeStretch » Sun Oct 20, 2019 8:03 am

Even if you are sure that backtesting with PV shows a 1% past out-performance over a low-fee S&P index fund, there is no guarantee that the high-fee funds will consistently out-perform in the future. The total loads/ERs/AUM fee on the funds are so high that the amount of return required to overcome the steep fees is huge.

At a minimum, your friend should consider not buying any more in the AUM portfolio and start DIY investing as you suggested. But rather than comparing net returns of the AUM and DIY portfolios, your friend should consider unwinding the AUM portfolio and moving to 100% DIY.
Last edited by HomeStretch on Sun Oct 20, 2019 8:18 am, edited 1 time in total.

livesoft
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by livesoft » Sun Oct 20, 2019 8:09 am

Another consideration are any of the extra taxes that one would have to pay for such funds. Such taxes are a "stealth reduction" in performance. They are stealthy because the money to pay the extra taxes usually do not come out of the money one has invested in the funds themselves. Instead the taxes come from a paycheck or a savings account, so they are not counted as an extra investment in fund shares.
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Cheez-It Guy
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by Cheez-It Guy » Sun Oct 20, 2019 8:12 am

Asking for a friend. . .

mptfan
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by mptfan » Sun Oct 20, 2019 8:15 am

Did your friend ask for your advice about their portfolio?

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CompoundedInterest
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by CompoundedInterest » Sun Oct 20, 2019 8:45 am

mptfan wrote:
Sun Oct 20, 2019 8:15 am
Did your friend ask for your advice about their portfolio?
Yes, sent me over his latest statements and asked what to do as he started noticing the 5.75% being lopped off each contribution. He told me his background is in health insurance and paying a sales commission upfront made sense to him when he signed up -- and didn't realize there was an alternative. I'm guessing his advisor didn't go out of his way to explain the same.

I get asked these Q's from time to time. Typically it's pretty straight-forward: someone getting soaked in poor performing funds and being charged an AUM% -- and solution is clear-cut.

With this one, it''s the 1st time I've personally ran into loaded-funds (I thought they went away or were dying). The performance was high enough that just selling wasn't going to be an obvious benefit -- especially if he doesn't allocate well with the rolled-over money, pick good funds, doesn't sell in bad times. So I posted here.

As far as taxes, all of these funds are in Roth account.

dbr
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by dbr » Sun Oct 20, 2019 8:54 am

Loaded and expensive funds are not also by definition poor performing. Outperforming an arbitrary benchmark in some random period of time is perfectly possible by chance. Outperforming (meaning greater return) an arbitrary benchmark on average is perfectly possible if the risk is greater.

If a person invests badly in terms of cost but the actual results are good, then it is what it is, but it should not be taken as a prediction of good future chances. Sometime people refer to the concept that outcome should not be confused with strategy.

Because investment returns are as variable as they are there are no strategies that are guarantees. It more like just opting for better odds never being sure for sure what will happen.

At the same time because none of this is the result of the salesman or the managers doing anything of value, one should be offended and resentful of having one's money stolen by people who aren't earning it, and only a fool continues to do that after they see what is going on.

Then there is this: https://www.youtube.com/watch?v=aMPu99_Xvjw

Strayshot
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by Strayshot » Sun Oct 20, 2019 8:57 am

Yes, it is highly likely he is paying an AUM fee to the advisor.

Even if the funds manage to outperform approximately by their expense ratio, why take that risk when so many alternatives are available?

Remember that the front-load not only puts each fund significantly behind any non-load peers at the get-go, but the money that would have been invested for the load is also not compounding with the rest of the investment.

Thought of another way, your friend is throwing away nearly 6% of everything he invests.

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Svensk Anga
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by Svensk Anga » Sun Oct 20, 2019 9:44 am

One trick I have seen with American Funds is that they show past performance averaged over many decades to mask the fact that they are not doing so well lately. Might this be happening with your friend's funds? Another trick is to show performance while neglecting the impact of the front-end load.

Supposedly markets were less efficient decades ago when most stocks were held by individuals. Now institutions dominate and there is less "dumb money" for the professionals to take advantage of. It is becoming harder and harder for managers to outperform at a given risk level. So, future results are not as likely to be as attractive relative to indexes as past results. See Larry Swedroe's "The Incredible Shrinking Alpha".

I do think some active managers can outperform the indexes before fees, though there will be some periods of under-performance along the way. I have "play money" (<5%) in some active funds - Vanguard Primecap and Capital Opportunity, which have had great past performance. But their managers have to overcome fees of only 0.31 and 0.36%, a much lower hurdle than your friend's funds. The bulk of my portfolio is in indexes.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by ruralavalon » Sun Oct 20, 2019 11:26 am

CompoundedInterest wrote:
Sun Oct 20, 2019 7:16 am
I took a look at a friend's portfolio and would appreciate some feedback as the situation is not clear-cut and I don't have experience with loaded funds.

Specifically, he has a full array of MFS mutual funds. Each has 5.75% front-loads plus pretty high ER. The funds are:
MFS Value A MEIAX, ER 0.83, performance < index
MFS Growth Fund A MFEGX, 0.92%, performance < index
MFS International Intrinsic Value Fund A MGIAX, 0.98%, performance > index
MFS New Discovery A MNDAX, 1.32%, performance > index.
MFS Technology A MTCAX, 1.23%, performance > index.

My knee-jerk at first glance was to advise selling them all, going to something sane with no loads and reasonable ERs. However, the performance (when viewed through Portfolio Visualizer) is quite good -- outperforming the SP500 by about a percentage point for multi-year periods -- so he didn't get absolutely soaked in terms of performance, even accounting for all the fee drag.

A few Q's:
* How does one handle rebalancing with loaded funds? Does that load get charged when a portion is sold of one fund and used to buy another loaded fund? Any "in-family" fee waived if you, say, go from one MFS fund to another for purposes of rebalancing. (I fear the answer here is yes, loads are paid again, as he described the advisor calling up a few years ago and switching him out of an underperforming MFS fund and into another, paying the load again.)

* The ER on these funds are quite large by themselves. I thought the appeal to pay upfront loads was for lower fees later -- but these ERs along are high enough that I wouldn't consider the funds even if they were no-load. Are these ERs truly being charged on top of the load? If so, it's a miracle the investment has performed as well as it has.

* Does the advisor typically charge a % AUM on top of these loads and ERs? Surely not, I hope.

My thought it to tell my friend to at least stop contributing to these funds (and paying 5.75% with each contribution), track them side by side with portfolio under his own control and direct new contributions there, prove to himself he can do better, then when comfortable roll-over everything and just treat the loads already paid as the sunk costs that they are. Sound advice -- or -- differing opinions on what to do?
CompoundedInterest wrote:
Sun Oct 20, 2019 8:45 am
. . . . .
As far as taxes, all of these funds are in Roth account.
The large-cap domestic stock funds have not been outperforming the index. It seems foolish to hold both large-cap value and large-cap growth.

With the funds being in a tax-advantaged account, my suggestion to a friend who asked for advice would be to switch to diversified low expense index funds.
Last edited by ruralavalon on Sun Oct 20, 2019 11:39 am, edited 2 times in total.
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CompoundedInterest
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by CompoundedInterest » Sun Oct 20, 2019 11:28 am

Svensk Anga wrote:
Sun Oct 20, 2019 9:44 am
One trick I have seen with American Funds is that they show past performance averaged over many decades to mask the fact that they are not doing so well lately. Might this be happening with your friend's funds? Another trick is to show performance while neglecting the impact of the front-end load.
Looking in PV, the actual performance in the last few years has been good and not MFS doing funny business with return stats. If it hadn't been, the immediate solution would be obvious: sell it all now, get into low cost and no-load funds. But It has been real (good) returns that I can verify through PV and MStar that gave me pause and didn't just suggest selling it all now.

But PV has no way to account for loads on contributions in the final CAGR rates. It definitely dampens them, and I'd be curious to do a spreadsheet to figure out exactly how much of a negative effect it has, but I don't know how many years he's had the accounts, how often he's made contributions, etc...

Speaking in terms of just odds, I find it amazing he's gotten the returns he has considering the loads, the very high ER, and potentially an AUM% fee on top of all of that. It's a small miracle. And again, from an odds perspective, going forward I sure wouldn't bet on getting a miracle twice -- i.e. future returns match what he's seen with so much drag in terms of fees.

Sure has been eye-opening to come across this. I sure thought high loaded funds and high ERs went the way of the $50-100 per trade fees with a broker and ticker-tape machines. Guess not.

retired@50
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by retired@50 » Sun Oct 20, 2019 11:38 am

To me, the question is... Do you expect the "good returns" to continue. Based on all the reading I've done, a reversion to the mean may be in store for this investor. Just because the results so far haven't been a disaster, doesn't mean it's a good strategy... Sometimes in Vegas, playing black-jack, you can take a hit on 18 and get a 2 or a 3, and win. That doesn't make it a good strategy, as you will likely lose more than you win. Don't confuse outcome with process. In the Boglehead world, the process is to use index funds for broad diversification and to keep a lid on costs. This has been the most successful process for years... Best of luck.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by Camp Shore » Sun Oct 20, 2019 11:40 am

Since they are in a Roth I would consider getting them all sold and moved to Vanguard and buying their Total Stock Market Mutual Fund.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by retiredjg » Sun Oct 20, 2019 11:53 am

CompoundedInterest wrote:
Sun Oct 20, 2019 7:16 am
However, the performance (when viewed through Portfolio Visualizer) is quite good...
Did you remember to subtract the load when comparing? Remember that only $94.25 gets invested for every $100 your friend is sending in.

JW-Retired
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by JW-Retired » Sun Oct 20, 2019 12:31 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 7:16 am
Specifically, he has a full array of MFS mutual funds. Each has 5.75% front-loads plus pretty high ER. The funds are:
MEIAX, ER 0.83%
MFEGX, 0.92%
MGIAX, 0.98%
MNDAX, 1.32%
MTCAX, 1.23%

My knee-jerk at first glance was to advise selling them all, going to something sane with no loads and reasonable ERs. However, the performance (when viewed through Portfolio Visualizer) is quite good -- outperforming the SP500 by about a percentage point for multi-year periods -- so he didn't get absolutely soaked in terms of performance, even accounting for all the fee drag.
Trust your knee-jerking! Chances are your friend will continue to be soaked. There are thousands of mutual funds out there so it's trivial for fund salesmen to peddle only funds that did comparatively well for the last 5 or 10 years. Isn't it obvious they can switch what they offer investing rubes just as often as needed to sell only good appearing funds? :twisted:
JW
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alex_686
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by alex_686 » Sun Oct 20, 2019 12:40 pm

Since nobody has answered, generally you shouldn’t be changed a new load when exchanging between funds of the same family.

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CompoundedInterest
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by CompoundedInterest » Sun Oct 20, 2019 12:47 pm

alex_686 wrote:
Sun Oct 20, 2019 12:40 pm
Since nobody has answered, generally you shouldn’t be changed a new load when exchanging between funds of the same family.
Thank you. I sure hoped that was the case otherwise it's an even more raw deal than it appears.

I am really curious for him to call his advisor tomorrow and ask if there is an AUM% on top of all of this.

Thanks for the response.

dbr
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by dbr » Sun Oct 20, 2019 12:50 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 12:47 pm
alex_686 wrote:
Sun Oct 20, 2019 12:40 pm
Since nobody has answered, generally you shouldn’t be changed a new load when exchanging between funds of the same family.
Thank you. I sure hoped that was the case otherwise it's an even more raw deal than it appears.

I am really curious for him to call his advisor tomorrow and ask if there is an AUM% on top of all of this.

Thanks for the response.
There should not be an AUM if there is a load.

latebloomer2
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by latebloomer2 » Sun Oct 20, 2019 2:13 pm

I would tell him about this site that we all read daily :happy

dbr
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by dbr » Sun Oct 20, 2019 2:47 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 7:16 am

My thought it to tell my friend to at least stop contributing to these funds (and paying 5.75% with each contribution), track them side by side with portfolio under his own control and direct new contributions there, prove to himself he can do better, then when comfortable roll-over everything and just treat the loads already paid as the sunk costs that they are. Sound advice -- or -- differing opinions on what to do?
I wold not attempt to "prove" that one set of investments is better than another by tracking them side by side for a time. All investment results are uncertain enough that you can prove nothing regarding future expectations. I would be very leary of advising anyone to sell one thing and buy something else as one will be blamed if something else does not do well for any reason.

I think it would be better to send him through the getting started pages in the Wiki and other reading. Of course the up front costs in loads and ERs may speak for themselves.

It is correct that loads are sunk costs.

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CompoundedInterest
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by CompoundedInterest » Sun Oct 20, 2019 3:50 pm

dbr wrote:
Sun Oct 20, 2019 2:47 pm
I wold not attempt to "prove" that one set of investments is better than another by tracking them side by side for a time. All investment results are uncertain enough that you can prove nothing regarding future expectations. I would be very leary of advising anyone to sell one thing and buy something else as one will be blamed if something else does not do well for any reason.
Extremely sage advice! I will point the horse toward water but not attempt to get it to drink.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by Stinky » Sun Oct 20, 2019 4:33 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 8:45 am

Yes, sent me over his latest statements and asked what to do as he started noticing the 5.75% being lopped off each contribution. He told me his background is in health insurance and paying a sales commission upfront made sense to him when he signed up -- and didn't realize there was an alternative. I'm guessing his advisor didn't go out of his way to explain the same.

I get asked these Q's from time to time. Typically it's pretty straight-forward: someone getting soaked in poor performing funds and being charged an AUM% -- and solution is clear-cut.

With this one, it''s the 1st time I've personally ran into loaded-funds (I thought they went away or were dying). The performance was high enough that just selling wasn't going to be an obvious benefit -- especially if he doesn't allocate well with the rolled-over money, pick good funds, doesn't sell in bad times. So I posted here.
Welcome to the Board! Glad that you posted your questions.

I’m impressed that your friend came to you for advice, and that he provided you with his statements. I’m also impressed that you had a pretty good idea about mutual funds, and the loads and expense charges that some funds carry.

You’ve gotten some excellent advice already in this thread, and I’m sure the more will come in. I would like to encourage you to consider posting more frequently on this forum, and weighing in on some of the threads that are here. I think that you could provide valuable input to many of the folks who have questions about their investments.

Once again, glad that you joined us.
It's a GREAT day to be alive - Travis Tritt

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CompoundedInterest
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by CompoundedInterest » Sun Oct 20, 2019 4:59 pm

OP here / last Q:

Isn't the big selling point of loaded funds / A-shares vs. even their own brethren of different classes with no-loads is that ERs are lower over the life of owning the funds? I ask because in these MFS funds my buddy owns, there's a hefty load AND eye-popping ERs. If these are "low" ERs, I'd hate to see high ones.

With such high ERs and high loads, is the advisor likely getting paid twice -- some from the load and some from the ER / 12b-1 wrapped in the ER on-going?

Thanks all for the advice. I have read much over the years but never had a Q to post and am very impressed with the quality of the responses. "Long time listener; 1st time caller." :)

Elysium
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by Elysium » Sun Oct 20, 2019 5:08 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 7:16 am
My thought it to tell my friend to at least stop contributing to these funds (and paying 5.75% with each contribution), track them side by side with portfolio under his own control and direct new contributions there, prove to himself he can do better, then when comfortable roll-over everything and just treat the loads already paid as the sunk costs that they are. Sound advice -- or -- differing opinions on what to do?
This is a reasonable approach, but I hate to tell you that it's not going to happen. The reason, people who normally go through an advisor will from time to time run their performance by their friends as a check, typically they like to compare how well they are doing and/or any major red flags. But the point is that absent any major problems with performance, they are unlikely to budge from the path.

Besides, there is no guarantee they will be able to build a portfolio of index funds, even with your help, to beat this portfolio. Even with high costs and loads, these funds may tend to beat S&P 500 by taking on more risks. I have seen several such advisor built portfolios from friends of mine who had similar questions.

You may think very low about them, but my experience is that they are smart enough to build an asset allocation that doesn't look too shabby when compared to broad market indexes. The way they do this is by playing around on the edges with high risk sector funds, so that the periodic reports they send to clients always look good. Just about enough to keep them interested in on going AUM setup.

Finally, most people have no interest or time to learn and invest themselves, in fact chances are if they tried they will come up behind the high cost advisor built portfolios because they can't get an AA correct or keep one on track through various market cycles which is so essential for long term success.

Best thing you can do is point out the issues, and direct towards a parallel portfolio with new contributions, then see how that goes. If they get hooked then they will come back for more.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by retired@50 » Sun Oct 20, 2019 5:11 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 4:59 pm
OP here / last Q:

Isn't the big selling point of loaded funds / A-shares vs. even their own brethren of different classes with no-loads is that ERs are lower over the life of owning the funds? I ask because in these MFS funds my buddy owns, there's a hefty load AND eye-popping ERs. If these are "low" ERs, I'd hate to see high ones.

With such high ERs and high loads, is the advisor likely getting paid twice -- some from the load and some from the ER / 12b-1 wrapped in the ER on-going?

Thanks all for the advice. I have read much over the years but never had a Q to post and am very impressed with the quality of the responses. "Long time listener; 1st time caller." :)
My understanding is that the adviser gets his pay from the front end load and possibly the AUM fee, and the mutual fund house gets paid with the higher than average expense ratios. Best of luck.

dbr
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by dbr » Sun Oct 20, 2019 5:20 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 4:59 pm
OP here / last Q:

Isn't the big selling point of loaded funds / A-shares vs. even their own brethren of different classes with no-loads is that ERs are lower over the life of owning the funds? I ask because in these MFS funds my buddy owns, there's a hefty load AND eye-popping ERs. If these are "low" ERs, I'd hate to see high ones.

With such high ERs and high loads, is the advisor likely getting paid twice -- some from the load and some from the ER / 12b-1 wrapped in the ER on-going?

Thanks all for the advice. I have read much over the years but never had a Q to post and am very impressed with the quality of the responses. "Long time listener; 1st time caller." :)
The ERs on these funds are high and higher. So it is sort of true that A class has lower ERs. What is missing is funds such as at Vanguard that have no load and no ER. Well ER is so low it is effectively none, and as costs go down none is actually happening.

I don't know very much about the compensation system for selling loaded mutual funds, but I am sure the advisor only gets a piece of anything. Working for a brokerage shop as an investment advisor is not necessarily heaven.

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Wiggums
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by Wiggums » Sun Oct 20, 2019 6:11 pm

Elysium made a really good point. If your friend sells, what other funds can he choose from? Pointing him to the three fund portfolio or something similar would be a big change for someone
With a managed account.

I would be helpful to point out the fees and how the impact the performance. This maybe where the best solution is to suggest that he consider Vanguard PAS as a cheaper alternative. Obviously tax implications, etc must be considered.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by alex_686 » Mon Oct 21, 2019 11:57 am

retired@50 wrote:
Sun Oct 20, 2019 5:11 pm
CompoundedInterest wrote:
Sun Oct 20, 2019 4:59 pm
OP here / last Q:

Isn't the big selling point of loaded funds / A-shares vs. even their own brethren of different classes with no-loads is that ERs are lower over the life of owning the funds? I ask because in these MFS funds my buddy owns, there's a hefty load AND eye-popping ERs. If these are "low" ERs, I'd hate to see high ones.

With such high ERs and high loads, is the advisor likely getting paid twice -- some from the load and some from the ER / 12b-1 wrapped in the ER on-going?

Thanks all for the advice. I have read much over the years but never had a Q to post and am very impressed with the quality of the responses. "Long time listener; 1st time caller." :)
My understanding is that the adviser gets his pay from the front end load and possibly the AUM fee, and the mutual fund house gets paid with the higher than average expense ratios. Best of luck.
A couple of points.

The brokerage house gets paid on the front end fee and gets the ongoing 12b-1 marketing fees. The broker gets a cut of that. If you charge a front end load and 12b-1 for the sale, you can't charge a AUM for the advice. That is double dipping, is disallowed, and closely monitored. The 12b-1 fee is specifically broken out and should be easy to find. You can also see from the ER what goes to operations and what goes to the portfolio managers.

Charging a front end load is a old fashion way of paying your adviser. Getting high quality personal advice from a human is expensive. If you want a human to talk to you are going to have to pay one way or the other. From here we can get into how much advice you should be paying for and how you should pay for it. There are pros and cons to every model out there.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by mptfan » Mon Oct 21, 2019 4:35 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 4:59 pm
With such high ERs and high loads, is the advisor likely getting paid twice -- some from the load and some from the ER / 12b-1 wrapped in the ER on-going?
That's correct.

mptfan
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Re: Advice for friend - lots of loads and high ER yet good returns

Post by mptfan » Mon Oct 21, 2019 4:36 pm

CompoundedInterest wrote:
Sun Oct 20, 2019 4:59 pm
Isn't the big selling point of loaded funds / A-shares vs. even their own brethren of different classes with no-loads is that ERs are lower over the life of owning the funds?
Where did you get that from?


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Re: Advice for friend - lots of loads and high ER yet good returns

Post by NotWhoYouThink » Mon Oct 21, 2019 5:02 pm

How long has your friend had this account, and how often does his advisor change the investment mix?

My point is that even though these funds that he now holds, collectively, have beat the SP500 over some time period, that doesn't mean that your friend has been invested in those funds over that time period. If he's had the account for a long time, then 15 years ago he bought funds that had done well 15-25 years ago, and 5 years ago he was in funds that had done well 5-15 years ago, and now he is in funds that have done well over the last 10 years. But there may have been buying and selling involved to have that mix of "recent winners" at all times.

He shouldn't care about what the funds have done over the last 5-10-15-20 years, he should care about how his individual account has done over that time period. Has he/have you checked that?

It's easy to pick recent winners, harder to pick future winners. Pretty easy to decline trying to pick winners and index. But depending on your friend's age, you might advise him not to go with SP500, but to have a mix of Total Stock Market, or Total World, and bonds. Which would probably have a lower performance benchmark. And you'd have to explain to a guy who has been letting a professional salesman make his investing decision why that was a good idea.

Good luck with that.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by pkcrafter » Mon Oct 21, 2019 5:33 pm

Compoundinterest, you and friend should be aware that class A funds have a front-end load (commission) that is removed before the remainder of the money is invested, so returns do not reflect the entire amount handed over to the advisor, they only reflect what was invested after the advisor grabbed a chunk. Obviously, the listed return might look good, but it's not really as good as it looks.
Class A Share Mutual Funds: These funds charge what is called a "front load," which means that you'll pay a percentage of your purchase amount every time you buy shares. Front loads typically range between 3% and 5% but they can be higher. For example, if you buy an A Share mutual fund with a 5% front load, and you're buying $10,000 of shares, you'll pay $500. In different words, you'll end up investing $9,500, not $10,000.
https://www.thebalance.com/is-it-best-t ... es-4039035

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by dbr » Mon Oct 21, 2019 5:40 pm

pkcrafter wrote:
Mon Oct 21, 2019 5:33 pm
Compoundinterest, you and friend should be aware that class A funds have a front-end load (commission) that is removed before the remainder of the money is invested, so returns do not reflect the entire amount handed over to the advisor, they only reflect what was invested after the advisor grabbed a chunk. Obviously, the listed return might look good, but it's not really as good as it looks.
Class A Share Mutual Funds: These funds charge what is called a "front load," which means that you'll pay a percentage of your purchase amount every time you buy shares. Front loads typically range between 3% and 5% but they can be higher. For example, if you buy an A Share mutual fund with a 5% front load, and you're buying $10,000 of shares, you'll pay $500. In different words, you'll end up investing $9,500, not $10,000.
https://www.thebalance.com/is-it-best-t ... es-4039035

Paul
Yep. For example suppose one invested $10,000 with a 5.75% load and after five years got a quoted compound return of 8%. What they mean by that is that $9425 grew to $13848. But if you compute the return to get $10,000 to $13848 in five years the CAGR would be 6.7%

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by alex_686 » Mon Oct 21, 2019 5:55 pm

mptfan wrote:
Mon Oct 21, 2019 4:36 pm
CompoundedInterest wrote:
Sun Oct 20, 2019 4:59 pm
Isn't the big selling point of loaded funds / A-shares vs. even their own brethren of different classes with no-loads is that ERs are lower over the life of owning the funds?
Where did you get that from?
This is true, for funds that pay 12b-1 fees. B shares used to be popular. No front load, back load of 5%, shares converted to A shares after 5 years. The pitch was to avoid the front end load for buy and hold customers. The problem was that B shares changed a higher 12b-1 fee. So high that you where better off buying the A shares.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by Carpenterant » Mon Oct 21, 2019 11:34 pm

If he buys those same funds, class a, through Schwab there is no front load on them and he can continue to contribute if he wants. Schwab has a deal with mfs and many other mutual fund companies to not charge a front load that other brokers charge, not sure if fidelity or vanguard are the same. That would be one recommendation I would make to him. Others have posted better advice then I could on the rest.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by StormShadow » Tue Oct 22, 2019 12:12 am

CompoundedInterest wrote:
Sun Oct 20, 2019 7:16 am
Sound advice -- or -- differing opinions on what to do?
Yeah... if your friend doesn't ask for your financial advice, don't volunteer it.

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Re: Advice for friend - lots of loads and high ER yet good returns

Post by scubadiver » Tue Oct 22, 2019 1:13 am

CompoundedInterest wrote:
Sun Oct 20, 2019 7:16 am
I took a look at a friend's portfolio and would appreciate some feedback as the situation is not clear-cut and I don't have experience with loaded funds.

Specifically, he has a full array of MFS mutual funds. Each has 5.75% front-loads plus pretty high ER. The funds are:
MEIAX, ER 0.83%
MFEGX, 0.92%
MGIAX, 0.98%
MNDAX, 1.32%
MTCAX, 1.23%
My wife and I have a portfolio weighted average expense ratio of around 0.07%. Yes, the decimal is in the correct place. No, we don't have loaded funds. Why someone would pay a 5.75% load or 1% in annual fees is beyond me, but doing both? Wow.

Anyway, welcome to the forum. Glad you found this place, both for your benefit and your friend's.

Scubadiver

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