• Danny Lee, CFP®, CRPC®

Read If You Own Mutual Funds and Work with a Financial Advisor!

Do you own mutual funds inside your investment portfolio, or do you work with a financial advisor that recommends investing primarily in mutual funds? Continue reading...

First, what is a mutual fund? A mutual fund is where an investment company pools money together from other investors to buy individual stocks, bonds, and or other investments to construct a portfolio or "fund". You own a mutual piece of that fund.

Benefits of mutual funds?

  • It is professionally managed.

  • It offers investors diversification.

  • It provides investor exposure in specialized markets.

  • It spreads out the cost among many investors.

Drawbacks of mutual funds?

One, in particular, is the fee's associated with mutual funds. Not all, but many. Mutual funds have different types of fees:

1. Sales Load or Loaded Funds - a sales "load" or "fee" is a fee to invest in the mutual fund. This "load" ranges from 4-6% of your initial investment and is commonly paid upfront to the advisor as a sales commission. Mutual funds have different share classes and based on the class (A, B, or C), the fee structure will differ.

  • A share - charges an upfront fee and has a lower expense ratio.

  • Ideal for a long-term investor since fees are only paid upfront, and ongoing fee's are lower.

  • B share - charges an exit fee (when you sell) and has a higher expense ratio.

  • Not too common these days.

  • C share - charges a higher expense ratio than A-shares and a small exit fee but is commonly waived after one year.

  • Ideal for short-term retail investors.

2. Annual Expense Ratio - a % charge based on your overall investment and paid each year (annually) to the investment company. The expense ratio can range from .02% to over 1%, based on the investment strategy.

3. Commissions - who pays trade commissions these days? Many brokerage firms offer $0 commissions. (i.e., Charles Schwab, Fidelity, TD, Robinhood, E-Trade, and some others)


Below is a hypothetical/illustrative example of a $100,000 portfolio divided into five different "A-share" mutual funds. American Funds and Templeton are two large mutual fund companies.

We see, immediately after purchasing an American Fund funds, your initial investment is instantly down 5.75% (front load fee) or $1,150. Due to the "load" investor are starting with a lower principal amount ($18,850 vs. $20,000), and so this mutual fund investment needs to generate a 6.01% = [($1,150/$18,850)x100] just to breakeven (not factoring in the annual expense cost). Let's be honest, being down 5.75% right off the bat is a tough pill to shallow and getting a 6% return is not easy or guaranteed.

Source: https://www.morningstar.com/funds/xnas/abalx/price

⚠️ Another Warning Sign ⚠️

One warning sign is when you only hear from your financial advisor when they are making trades. Recommending different mutual funds year after year to "rebalance" the portfolio can be beneficial, if done effectively. As mentioned above, investing in "A-share" mutual funds, the front load fee is paid to the advisor each time a purchase is made. Selling an A-share fund within five years and purchasing another A-share fund must be substantiated with a prudent investment decision or in the clients best interest. Most mutual fund companies allow investors to switch into any fund within a fund family (same company) without incurring an upfront fee 👍. Your advisor should recommend an investment change within the same fund family. Watch your transactions closely because each time your advisor trades - they may be doing so to reap another commission.

💭 Other Options? 💭

  • Mutual funds without loads and transaction fees.

  • Index-based mutual funds.

  • Low-cost ETF's.

🔚 Conclusion 🔚

My goal is to speak the truth and be an advocate to novice investors by sharing insight in how some "shady" advisors run their practice. All blame shouldn't be on the advisor though. As an investor who's serious about investing and building wealth - it's worth your time to research this information. This information is publicly available to all investors, and fund companies are required to disclose them (advisor's should but some don't). Take an hour or two of your time because it may save you hundreds or thousands of dollars. Compound that throughout your investing career - that may leaves a huge dent in your overall wealth (check calculation below ⬇️). This is one reason why many clients prefer working with a fee-only advisor, who charges an hourly rate or a flat fee for advice/services and not inclined to steer you toward a mutual fund they get additional cash to sell.

$100K Initial Investment w/ No Sales Load

$100K Initial Investment w/ 5% Sales Load - Starting at $95K


Disclosure ⬇️


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