When I was learning the mutual fund business 25 years ago, there were two separate and distinct types of funds: load and no-load.

Load funds were those that charged a commission, which compensated the broker who put the client into the fund. These commissions took different forms — front-load, back-load, etc. — but the main point was the investor was going to pay a typically one-time fee for the advice they were getting in selecting funds, and the load was the mechanism used to pay the broker (indirectly, via the fund) for that advice.

No-load funds were those funds sold without any commission, and they were a revelation to individual investors. They effectively de-coupled the process of investing in mutual funds from the separate process of getting investment advice, as investors could pick their own no-load funds and buy them either directly from the mutual-fund company itself, or a bit later on, through the mutual-fund supermarkets that appeared at Schwab and Fidelity.

This ability to "cut out the middleman" was a huge deal to investors during the 1980s and 1990s and spurred the creation of a vast "do it yourself" industry of newsletters (including SMI), books, and other educational materials designed to help guide investors as to how they could invest on their own.

For those on the no-load side of the fence, the idea of paying 5% or more off the top when buying mutual funds seemed like a ludicrous idea, no matter how many charts were produced by commission-based brokers showing that it was actually a reasonable deal. But the one bummer of being a no-load fund investor was there were certain families of mutual funds that we often wished we could have access to, but couldn't because they were exclusive to the load/advisor camp.

At the head of this list was the American Funds group. They have long been the biggest, and more subjectively, at least among the best funds that the load camp had to offer.

Which is why this week's news that the American Funds are making all of their funds available without loads via Schwab and Fidelity is such big news. To grizzled observers of the decades-long mutual-fund Cold War, this is the Berlin Wall event. The underlying structure underpinning load funds has been crumbling for years and the system has obviously been dying a slow death. But this is the visible event that elicits the "Wow, I never thought I'd see the day!" reaction.

Meet the new boss, same as the old boss

On the surface, getting rid of mutual-fund sales loads seems like great news for investors. Who doesn't like eliminating fees, especially big ones like these mutual-fund commissions? Unfortunately, the changes that have led to the demise of mutual-fund loads haven't been quite as transformative for investor fees as one might think.

First of all, fewer and fewer investors seem interested in tackling their own investing duties. Ironically, the great liberator of individual investors — the no-load mutual fund — is more typically wielded now by a fee-only advisor than an individual building their own portfolio. Make no mistake, the shift from a commission-based advisor to a fee-based advisor (one who charges a percentage of the assets being managed) is a very positive development, as it aligns the investor's and advisor's interests: both want to grow the account balance as much as possible over time. That wasn't always the case with commission-based advisors, who faced two significant temptations: 1) to select funds based on which funds paid the highest commissions, and 2) to switch the client from one fund to another in order to generate new commissions.

But purely from a cost standpoint, the win in eliminating loads hasn't necessarily been as huge as expected for many investors. Consider an investor with a $250,000 mutual-fund portfolio. In the bad old days, an advisor might have put that investor in funds carrying 5% front loads, which would have cost them $12,500 up front. They would have then paid the funds' expenses on an ongoing basis, but many front-end load funds had pretty reasonable expense ratios. Today, the investor avoids those loads, but if the advisor is charging 1% of the account balance, that's $2,500 each year. After 5 years, the outlay is the same between the two arrangements, assuming the underlying fund expenses are equal.

And it's that last point that catches in the proverbial craw. Because while the old, transparent load structure has crumbled and is rapidly disappearing, it has been replaced with a more insidious version levied by the new mutual-fund middle-men, the online brokers.

The reality for most no-load mutual funds these days is they're dead in the water if they aren't available via the big brokerage platforms, such as Schwab, Fidelity, TD Ameritrade and so forth. There's no army of commission-based brokers pushing their funds, and most fee-based advisors use Schwab or Fidelity's platforms for their trading, so they're at the mercy of the brokers to be made available to the investing public.

Unfortunately, mercy is in short supply. The brokers have gradually jacked up the costs of access for funds to be listed on these platforms. In order to be available on Schwab's mutual-fund platform without a transaction fee (NTF, in SMI parlance), it now costs a fund 0.40% of all the assets invested in that fund through Schwab accounts. That's an ongoing, not one-time, fee. And most funds really have no choice but to pay the toll to reach the prospective clients. So they do what businesses always do when faced with a new expense (or tax): they pass it on to you via higher fund expense ratios.


The end result is that while mutual fund loads are rapidly receding into the history books, the overall expenses investors are paying aren't receding very quickly. Granted, some of those costs are being redirected into better benefits for investors — unbiased advice from a solid advisor is a much better use of an investor's "expense" dollars than the old commission-based advice investors used to receive. But some of today's higher costs are of little to no benefit to the investor. A no-load fund that has to jack its expense ratio up 0.40% to cover the expense of being listed on the broker platforms isn't better for investors than it used to be, it's simply more expensive.

At any rate, we'll focus on the good news as we conclude this history lesson, and the good news is that no-load fund investors now have access to the American Funds, a fund family that has long produced excellent results for investors at reasonable ongoing costs. Being able to access those funds without a load now is a positive thing for Upgraders and other investors who thrive on fund choice and diversity. While the American Funds have long been available through the SMI Tracker, we'll be adding them to our Upgrading fund rankings and incorporating them into our fund selection process going forward.