Fund companies have moved on--you should, too.
The debate over load versus no-load funds has flared for so long, and with so much more smoke than fire, that it seems like a trick birthday candle. It reignited for me when reading some of the reader comments--in some cases, arguments--on columns that have appeared on Morningstar.com in recent months because they mentioned specific funds: that is, specific funds that carry loads. To some, the very deed is inexcusable.
The participants often resemble the Montagues and the Capulets, with neither side willing to cede a millimeter of ground. That kind of intransigence has never been helpful, but one could at least understand the debate--15 years ago. Until then, many funds were only available with loads and through brokers. Others were sold without loads, and you had to buy them directly from their fund companies--no broker involved and no outside help given. There was really no overlap across those two worlds, and disciples of each actually refused to do business with each other in many cases.
Here's the thing, though: The debate never made much sense to begin with, it's over, and nobody actually won.
We Hold These Truths to Be Self-Evident
Of course it's cheaper to buy a fund with no commission rather than paying a 5.75% up-front load, but the different structures were meant for different people and promise different things. But more to the point, that black-and-white world no longer exists.
Loads have always been used as a tool to compensate intermediaries for selling funds. Full stop. An investor who works with a broker expects to receive help and an ongoing relationship that, in the best circumstances, benefits the investor for a lifetime. In return, the broker expects to receive payment--in an admittedly complex and arguably antiquated way--mainly through the loads charged by mutual funds and the commissions charged for trading other securities.
You may have heard other reasons for the load structure. Some once opined that better managers worked at load shops (a myth). Others have claimed that loads are there to help encourage investors to avoid selling funds too quickly after buying them (not true). That story confuses happy consequence with intent. Some firms have occasionally added redemption fees in an attempt to slow down fund share trading, but loads aren't part of that narrative. Rather, in the most traditional sale of A shares, a small slice of each load goes to the fund company's internal distribution arm, in part to compensate its wholesalers, while the rest goes to the brokerage firm with some of it headed directly to the broker who sold the fund, to split based on whatever formula on which the two have agreed.
The fund industry looks remarkably similar to any manufacturing business, except that you know roughly how much the commission is--because it's the load.
The fund company manufactures the fund (that is, Franklin Templeton, for example, with Franklin Templeton Distributors acting as its wholesaling arm); the dealer handles the heavy lifting elements of distribution (that is, Merrill Lynch); and the broker, who works for the dealer, connects directly with the customer to make a sale. (The "dealer" in this case is referred to in the industry as a "broker/dealer" or brokerage firm, but they really function as "dealers," just like car dealers would, but in the mutual fund context.) There are plenty of decent brokers, making the purchase of funds with loads a reasonable decision for those who want help making their investing decisions. But because we're talking about money, the business naturally attracts people who have skill with sales and a particularly strong desire to make money.