- The Washington Times - Thursday, March 6, 2003

As many investors seek financial advice in a shaky market, some might discover that professional help comes with a hefty price higher fees and lower returns on their mutual funds.
In a shift from the do-it-yourself investing of the 1990s, two-thirds of the 2,400 mutual funds introduced in the past two years charge a load, or a broker's sales commission, according to Morningstar.
Many funds that originally did not carry loads also are adding them.
And numerous index funds, known for their low costs because they basically track the performance of a specific market, have sales charges of 5 percent or more, although their returns underperform Vanguard's 500 Index Fund, which carries no load at all.
Investor confusion over loads has prompted new guidelines in the industry to promote disclosure of potential conflicts of interest as more mutual fund companies pay advisers to steer customers their way.
Loads, which are charged by mutual fund firms, primarily are used to pay brokers and planners for sales of their products. Many planners also rely on them as compensation from investors who seek their investment advice.
"This is the struggle between getting help from a professional sales person rather than a professional adviser," said Paul Merriman, publisher of FundAdvice.com.
"It would be unfair to say that everybody who takes a commission is a sales person.
"But the problem is that it's hard to know the difference," he said. "What gets people in trouble are sales people."
The new measures from the Certified Financial Planner Board of Standards, which took effect Jan. 1, require planners to inform investors of their right to ask about the professional's compensation arrangement whether in dollar amount, percentage or range of either.
Rick Adkins, chairman of the CFP board, said the rules were prompted in part by investor complaints about sales commissions.
In recent years, he said, many investors were steered toward classes of funds that charge a commission in smaller amounts over several years rather than upfront, leading them to mistakenly believe they were purchasing a no-load fund.
"There was more potential for confusion and misunderstanding," said Mr. Adkins, a certified financial planner in Little Rock, Ark.
"We were trying to create more clarity for consumers, so they can evaluate any potential conflicts of interest."
The questions come as the General Accounting Office, Congress' investigative arm, examines whether fund firms might be charging unnecessary fees, leading to greater losses for investors already hurting in a three-year bear market.
A congressional panel has asked for completion of the report by April 15.
The shift toward more funds charging loads also is a contrast to the 1990s, when no-load funds flooded the market with the promise of an easy, inexpensive way to reap gains from the then-bull market.
Today, the average load has edged up to 3.82 percent, according to Morningstar, and Scudder Income, one of the first no-load funds created, now charges a 4.5 percent initial fee.
Meanwhile, load funds underperformed their no-load counterparts over 1-, 3- and 5-year periods, Morningstar said. The exceptions were domestic equity and taxable bond funds, which showed a slightly better performance for load funds for this year through Feb. 26.
The case may be most striking for index funds, passively managed vehicles known for their low costs.
The Guardian S&P; 500, Advantus Index 500 and Wells Fargo Equity Index Fund charge loads of up to 5.75 percent while returning less than the no-load Vanguard 500 Index.
So what can investors do to avoid loads?
Some analysts suggest investors use fee-only planners, as they are called, since their pay is linked to flat fees or a portfolio's performance, not sales commissions.
However, as such planners often charge minimum fees that are out of the reach of middle-class investors, other experts advise investors to do some independent research and ask questions of their advisers.
Web sites such as Morningstar's, for instance, can tell investors whether their funds charge a load, and point them to comparable no-load funds.
Some planners also might be able to get a load waived for new investors if they have many clients already invested in that fund family.
Still, Mr. Adkins cautions against an undue emphasis on fees, noting that loads represent the price investors pay financial planners for their expertise.
A better approach might be to focus on a planner's credentials, investment approach and accessibility, so investors know whether they can trust their advice, he said.
"Advisers make sure there's a consistent, disciplined process. That's where the greatest value is added," Mr. Adkins said.
"Particularly in volatile periods, people don't behave rationally. They try to time the market, and the cost of that can be huge."


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