The best way to make sure you earn the top return possible on your investment portfolio is to pay no more in investing fees and expenses than you absolutely must. You won't be able to avoid entirely the costs of investing, but there are some fees that you never need to pay.
One of the most egregious investing fees, the mutual fund sales load, has a long and checkered past that goes back for decades. Even today, millions of investors pay sales loads for access to the mutual funds that impose them, even though you can find hundreds of perfectly acceptable alternatives that don't charge such fees. Let's take a closer look at the mutual fund sales load and why you should never, ever join the ranks of those paying it.
Why are sales loads so scary?
As annoying as it is to pay any fee related to your investment portfolio, most of the fees you'll commonly see at least have some connection to the investment that you're actually making. For instance, when you pay a commission to a broker to buy a stock, the $8 or $9 you'll often pay typically goes toward covering the costs of the computer equipment and trading personnel who ensure that your trade gets executed properly, as well as dealing with the operational requirements of delivering securities.
Within the mutual fund arena, every fund charges shareholders for the expenses it incurs on their behalf. Paying for a manager to make investment decisions benefits every investor, as do the professionals charged with ensuring that the fund complies with all applicable securities regulations in how it conducts its business and deals with its fund shareholders. While some funds charge more or less than others, it's reasonable that every fund investor should pay some share of their expenses.
Sales loads, on the other hand, don't go to cover the fund's costs at all. Rather, they represent a way for the brokers who sell shares of those funds to you and other investors to collect commissions as compensation for their efforts.
The Financial Industry Regulatory Authority sets a maximum sales load of 8.5%, which means that, for every $1,000 you invest, up to $85 can get diverted immediately to pay the sales professional you work with to buy the shares. When you get your statement, you'll see that only the remaining $915 actually went toward purchasing fund shares.
In some cases, mutual funds don't charge a load when you make your initial purchase; but instead, they reserve the right to collect similar fees when you sell your shares. Known as a deferred or back-end sales load, these charges take away part of the proceeds of your sale of shares. In many cases, deferred sales loads are contingent on the number of years you've owned your fund shares, with the fee gradually declining the longer you wait before you sell.
Why you don't need to pay sales loads
The main problem with sales loads is that it's easy to find similar mutual funds that don't charge such fees. No-load funds have become the norm in the fund industry, with thousands of funds available that don't charge any sales loads at all. In most cases, you can find no-load funds where the investment objectives and overall strategy closely mimic those of a fund with a sales load.
Admittedly, some proponents of sales loads argue that the brokers and other financial professionals who advise clients deserve to be paid for their efforts. But the best way for professionals to avoid conflicts of interest is to charge for their advice on a fee-only basis. That removes the incentive for them to recommend potentially inferior funds with sales loads over better funds that wouldn't provide them with compensation. It might be harder to get customers to pay an outright fee for services rather than having it quietly taken out of their investment checks, but it gives customers better service.
Many investing fees are simply facts of life that you'll have to learn to live with. Sales loads, however, are an antiquated relic from older days, and you don't need to pay them. In most cases, going with no-load alternatives, and keeping more of your own money to go to work for you is the better move in the long run.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.