In case you missed it, a study released last year by the Zero Alpha Group and Fund Democracy found that investors who buy index mutual funds through brokers are paying a steep broker penalty. According to the groups, clients are sold funds with much higher operating expense fees even before adding the distribution fees related to the cost of using the broker. The bottom line for investors is that the extra operating costs paid over time for broker-sold load index funds are triple those paid by investors in true no-load mutual funds. The study refers to the following example.
On a $10,000 investment earning an annual return of 10 percent over 20 years, the average investor in no-load, no 12b-1 fee index funds would pay approximately $2,582 in operating expenses. The average investor holding a no-load fund that charges a 12b-1 fee would pay $3,744, while the average investor holding load index funds would pay $7,600 in operating expenses. Although one would expect using a professional advisor to improve an investor's performance, the investor instead pays a significant penalty. The groups found that load index funds charged substantially higher fees - even before counting the fees paid to the broker - than true no-load (no 12b-1
fee) funds. When investors used a broker to buy index finds, they paid twice; first, they paid the broker; second, they paid a broker penalty in the form of higher fund fees.
"These findings show that brokers are serving as agents of fund companies, not in the best interests of their investor clients," says J. Christopher Kerckhoff Jr., whose firm, Chesterfield, Mo.-based Plancorp, is a member of the Zero Alpha group, a network of financial advisory firms. "Our study is troubling for investors who use brokers to purchase load index funds. We would fully expect such investors to incur distribution costs associated with compensating their broker or advisor. However, there is no valid reason for such investors to have to foot the bill
over and above what true no-load investors do for other, non-distribution services."
