Imagine that a seller offers you a TV streaming service that offers the exact same movies and TV series as Netflix, at the same monthly cost. The only difference: you have to pay a $ 100 entry fee to join.

It’s hard to imagine someone accepting the deal from the competition. However, many investors acted similarly for years by buying load-bearing mutual funds rather than no-load alternatives.

When the first modern mutual funds arrived in the 1920s, load-bearing funds were the only type of funds available. Investors paid a fee to a broker or other intermediary in order to invest. But these days, there are plenty of no-load alternatives to choose from. Additionally, historical data does not show a substantial performance difference between charge and no charge funds; in fact, Morningstar found that no-load funds have a slightly better track record in recent years.

More and more investors are realizing that paying more for an investment does not mean that the investment is better. The most recent evidence comes in the form of Charles Schwab’s announcement that he will stop selling mutual fund share classes that carry sales charges.

As The Wall Street Journal reported, Schwab will no longer offer encumbered share classes to clients, although clients who already own shares in such funds can continue to hold them in Schwab. “It’s a low-volume business that no longer makes sense for us to run it,” a company spokeswoman told The Journal. (1)

The numbers support Schwab’s assessment. According to the Investment Company Institute, a mutual fund trade group, investors drew more than $ 500 billion of loaded share classes between 2010 and 2014; During the same period, they invested $ 1.34 trillion in no-load classes. Many mutual fund firms offer some funds that would normally carry charges to retail investors with a fee waiver, making it even more illogical for investors to pay for something they can get for free. Schwab’s decision remains a sign of things to come in the mutual fund market.

This trend predates the new fiduciary rules from the Department of Labor, but requiring a broader swath of financial professionals to put the financial well-being of clients first will undoubtedly hasten the demise of cargo funds. Schwab has openly said that the new Labor rule was not the direct catalyst for his decision, but changing standards may contribute to similar decisions by other companies in the future.

Some mutual fund companies may also abandon certain classes of stocks, as more investors become smart enough to avoid them. One company, Waddell & Reed, said in February that it would merge class A shares, which charge an upfront charge, into institutional shares, which typically charge no charge and offer lower expense ratios. Other mutual funds will likely continue to offer stocks that include charges, if only to benefit the few investors who don’t realize they could get a better deal elsewhere.

Fee-only financial advisers and other professionals who do not benefit from commissions on individual investment products have long pushed their clients away from cargo funds. Mutual fund companies introduced bottom load and level load funds in large part because some investors had begun to resist the idea of ​​paying a commission up front, but the fact is, there is no good reason to pay a broker. 5 percent or more. to invest, it doesn’t matter when you pay it.

If Schwab clients were still buying load fund shares in substantial amounts, you can be sure that Schwab would be happy to continue offering them, at least in taxable accounts. Schwab’s decision to close its cargo fund business is a sign that too many investors have come to realize that cargo funds are bad business.


1) The Wall Street Journal, “Charles Schwab Will Stop Selling Charge Mutual Funds”

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