(24) During the 1990s, "funds became the primary investment vehicle of the average American investor." (25) By 2002, the share classes of nearly all load funds
were sporting 12b-1 fees.
The overall performance record of a good load fund
can offset the absence of a sales charge in a mediocre no-load fund.
Disadvantage: A load fund
costs more because the investor must pay a sales commission.
Expense ratios are more negatively correlated with load fund
redemptions than with no-load redemptions.
Return distributions of the no-load fund group and the load fund
group are compared against one another to determine which would be preferred (i.e., in the efficient set).
Today, an investor who buys a load fund
has to decide among front-end load funds
, back-end load funds
, funds with 12b-1 fees, funds with 12b-1 fees and declining redemption fees and so forth.
Ippolito finds that "load funds
generally earn sufficiently higher rates of return compared with no-load funds to pay for the extra charges" (1989, p.
To appreciate the significance of the CDSCs' development and the competitive pressures CDSCs have exerted, it is necessary to understand how selling effort is compensated for load funds
. For a load fund
, a sales charge or "load," such as 6% of the amount invested, would be deducted directly at the time of sale and used to compensate the sales representative and the selling organization.
Of all the justifications offered for allowing the use of fund assets to pay marketing costs, the one ringing most true, circa 1978, was the SEC staff's suggestion that a fund marketing system relying on the assessment of high sales loads "is no longer viable because investors are increasingly unwilling to pay a high entrance fee." (204) In other words, in the face of an increasingly sophisticated, price-conscious marketplace, load fund
marketers were seeing their customer base eroded by the no-load option.
Before Rule 12b-1, the no-loads competed straight up with the load funds
; loads typically were charged at the time of sale, with a smattering of funds featuring redemption fees.
The same pessimism applies to any SEC efforts to clean up revenue sharing, the mutual fund industry's "dirty little secret." (461) This shady practice, featuring massive payments often unsupported by written contracts, pumps huge amounts of cash into the broker-dealer community over and above compensation from load fund
commissions or 12b-1 fees.