What Is The Difference Between Load And No-Load Investments?

Load investments are frequently sold by stockbrokers, insurance agents, and annuity salesmen. These investments subtract a sales charge from the dollars invested in order to compensate the individual who sold the product. The vast majority of mutual funds, insurance policies, and annuity contracts are loaded investments.

Load mutual funds are sold as A, B, or C shares. All load products pay the individual who sold the product their commission up-front. However, each share class charges the investor differently. A-shares subtract an up-front sales charge, usually 5 percent, from the investment. B-shares impose a deferred sales charge (as much as 5 percent) if the investor sells the investment within a defined period of time, usually within six years. Additionally, B-shares traditionally charge high annual fees to enable the fund to quickly recoup the cost of the commission paid to the salesperson. B-shares turn into A-shares once the period when the deferred sales charge passes. Finally, C-shares do not charge an up-front or deferred sales charge. Rather, C-shares charge the investor high annual fees during the life of the investment.

No-load mutual funds do not charge the investor sales charges at any time, and usually come with a much lower annual expense ratio than loaded C-share funds. Investors usually purchase these funds without the help of a broker, or through the services of a fee-based or fee-only financial planner. Almost universally, no-load funds are more cost effective than loaded funds. In fact, the average annual expense ratio of no-load funds is approximately 1.07 percent compared to an annual expense ratio of 2.05 percent for loaded C-share funds.

Cost savings are equally relevant when comparing load and no-load annuities and insurance products. The average loaded variable annuity has an annual expense ratio of 2.39 percent, while no-load annuities have an average expense ratio of .72 percent. Additionally, the average first-year premium of a loaded $1 million universal life insurance policy on a 55 year-old male is approximately $10,032. By comparison, the first-year premium on the same policy without a load is $3,595.

About the author

Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is an expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or lon@networthadvice.com. Learn more about Net Worth Advisory Group at http://networthadvice.com and visit Lon's blog at http://www.utahfinancialadvisor.blogspot.com.

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