Score one for investors.
If you ever thought about investing in a terrific fund but didn't because of a fat sales charge, you will rejoice at the arrival of a new service that takes the "load" out of a load fund. A Web site called Invest For Less allows investors to buy load funds without paying commissions and, in some cases, to invest modest amounts in low-cost fund share classes that often would otherwise require initial minimums of $100,000 or more.
Invest For Less is sort of like a Costco for mutual funds. It charges $250 a year for membership in its platform. Once you join, you are eligible to buy the "adviser" or "institutional" share classes of funds on its platform. This is possible because Invest For Less, despite looking and smelling like a broker, is structured as a registered investment adviser, with Scottrade as its custodian. So Invest For Less members have access to the same share classes that are available to other advisers on the Scottrade network.
Among the load funds available without commission are all 12 featured in "Our favorite broker-sold funds."
If this seeming loophole is so easy to exploit, why hasn't anyone come up with this model before?
"Any registered adviser could have done this in the past," says Kevin Knull, the chief executive of Invest For Less, which is based in White Stone, Va.
Click graphics to see interactive charts
Growth Fund of America
Growth Fund of America F-1
Granted, $250 may seem like a mighty sum if you currently use a discount-brokerage platform and buy only no-load, no-transaction-fee funds. But the figure is dwarfed by the size of the typical sales charge. For example, someone investing $10,000 in the Class A shares of American Funds' Growth Fund of America (AGTHX) would save the initial $575 sales fee, quickly offsetting the first year's membership cost.
By getting the low-cost Growth Fund of America F-1 share class (GFAFX) through Invest For Less, the customer would also save $7 a year in annual fees.
Should you decide you don't want to purchase any more funds through the site, you could transfer your fund shares to your ordinary brokerage account and avoid the $250-a-year fee.
For example, the listed minimum on the site for the institutional share class of Pimco Total Return (PTTRX) is currently $100,000. But once Invest For Less reaches that threshold, it can drop the minimum for its members to $100. You'll pay a $17 transaction fee to Scottrade to buy that share class. But considering that the expense ratio is just 0.46% for the institutional class, compared with 0.75% for the Class D shares (PTTDX), which are sold without a sales charge by many discount brokers, it may make more sense to pay the transaction fee.
Quality picks, lower cost
For investors, this new service is an obvious win. "The more opportunities investors have to purchase quality investments at a low cost, the better off we all are," says Diahann Lassus, an adviser and former chairwoman of the National Association of Personal Financial Advisors.But for brokers and advisers who earn their livelihoods from sales commissions, and for the fund companies that rely on these sales channels, Invest For Less poses an undeniable threat. "It could carve out a niche from their business," Lassus says.
In fact, Invest For Less originally launched with Charles Schwab as its custodian, and it had been operating for several weeks on Schwab's platform until Schwab unexpectedly terminated the relationship in early March.
"Schwab's Advisor Services platform is designed for independent investment advisers who provide personalized investment advice," says Schwab spokeswoman Alison Wertheim, implying that Schwab took issue with the do-it-yourself format of Invest For Less.
But considering that Schwab acts as the custodian for about 6,000 advisers, who entrust approximately $590 billion in fee-generating assets with the company, it doesn't seem like a stretch to imagine that protecting other advisers' interests could have come into play.
Knull stresses that he isn't trying to make war on the advisory profession. "Most investors need some advice," he says, "but advisers should be able to justify their fees."
To this end, Knull is building a network of fee-only advisers (who don't accept commissions) to be affiliated with the site.
Conflicts with fund companies that rely heavily on advisers and brokers could pose further hurdles for the fledgling company. "To establish an account with American Funds, we require than an investor use an adviser," says American Funds spokesman Chuck Freadhoff. "Invest For Less appears to be a registered investment adviser and, as such, would meet that requirement, but we are reviewing its business model."
Continued: The trend is lower costs
