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February 14, 2021December 27, 2022 by Impersonal Finances
A while back, I discussed my disappointment with the fees I was unwittingly charged by my Edward Jones broker, long before I made the switch to Vanguard—or even knew it was an option. As a follow up, I wanted to take a closer look at the bullsh*t load fees in the American Funds options that Edward Jones and other brokerages seem to love so much.
You’re Probably Getting Screwed By Edward Jones Fees
In my scattered assessment on how I got screwed by fees in my Edward Jones account, I loosely compared an initial $4,000 investment at Edward Jones to a similar investment in VTSAX (or rather VTSMX since the amount is under $10,000). I determined that, without touching that money over a 10-year period, I essentially cost myself over $1,000 in fees and the subsequent compounding gains that would have resulted had I been invested in a better fund. Alas, I had not been. Instead, Edward Jones reflexively threw me into American Funds, which come equipped with high expense ratios, but most egregiously, front load fees that decimate earnings potential.
What are load fees?
So what are load fees? Well, they’re bullsh*t, is what they are. Load fees are basically a sales commission that you’re either paying upfront—as with American Funds Class A shares—or on the back-end when you sell your investment. Some funds will “level-load” that commission throughout the duration of the investment. Be it front-load, back-load, or level-load, these fees are a load of horse manure.
At American Funds, it’s standard for a 5.75% load fee on stock-heavy funds, and 3.75% on bond funds. This is in addition to expense ratios ranging from 0.59% to a full 1%. So, for every $1,000 you place in an American fund, $57.50 is gone immediately to pay the cover charge into that fund. Obviously, the large chunk of change you’re throwing into a mutual fund—which is normally a good thing!—the larger that 5.75% looms. $10,000 in is a whopping $575, and so on and so forth. And this is all before factoring in the expense ratios you incur annually.
When you consider that Vanguard’s highest expense ratios for similar funds are in the 0.14% range and involve no such load fees, it’s pure insanity that anyone would willingly choose funds American Funds, or any load-based funds for that matter.
But lo and behold, such insanity persists.
Dave Ramsey, who recently endeared himself to debtors with his appearance on Fox News, has some terrible advice for novice investors. Dave has advocated for these exact types of front-loaded funds because they come with an “investing pro,” further perpetuating the myth that you need one. Not to dismiss the countless number of people Dave has helped with his straightforward advice, but it is flat out irresponsible for someone of his stature in the finance community to recommend throwing away 5% of your initial investment on a load fee. Clearly, Dave has never heard of Vanguard.
American Funds vs. Vanguard Funds
Let’s compare a mix of American Funds to comparable funds at Vanguard. Not to pick on my friends at Edward Jones (again), but what they’ll typically do is put you in five or six of these American Funds offerings. This makes sense from a diversification standpoint, but it also makes sense for them from a commission standpoint. The more funds you’re in the merrier.
What this often amounts to is some combination of the following:
- Balanced Fund (ABALX) – 5.75% load fee – 0.59% expense ratio – mix of US stocks and bonds
- Bond Fund (ABNDX) – 3.75% load fee – 0.61% expense ratio – US bonds
- Fundamental Investors Fund (ANCFX) – 5.75% load fee – 0.62% expense ratio – growth stocks
- New Perspective Fund (ANWPX) – 5.75% load fee – 0.76% expense ratio – mix of US & international stocks
- New World Fund (NEWFX) – 5.75% load fee – 1.00% expense ratio – international stocks
Add all of this up, and you basically have a target date fund at Vanguard, which includes four basic funds: US Stocks, US Bonds, International Stocks & International Bonds. But instead of the 0.14% expense ratio you would pay on a target retirement date fund for the year 2035 at Vanguard (VTTHX)—with no load fees, of course—you’re saddled some 4-5 times the expense ratio and massive load fees that prevent you from keeping pace with a simple index. Any outperformance by your American Funds is likely to be negated by these fees—on the off chance that they do indeed outperform the target date fund, which has returned over 11% annually over the past 10 years.
David at Oche Sin Coche recently wrote an excellent piece comparing the performance of another American Funds offering, AGTXH, to the S&P index and a Vanguard growth fund. You can see just how much load funds eat away at your investments, virtually eliminating any outperformance (in the instances when there is any outperformance).
Don’t pay for American Funds load fees
The decision I had to make when I moved to Vanguard was whether or not my American Funds at Edward Jones would, indeed outperform the market (VTSAX). At that point, I had paid the front-load fees, so that was a sunk cost. The expense ratio was a little higher, but with the massive load fee already out of the way, the expense ratio alone wasn’t likely to torpedo my earnings. Cathie Wood’s ARKK funds, for example, charge a 0.75% expense ratio, but have proved more than worth it for her investors over the last five years.
Ultimately, what brought me to the quick decision to get out of my American Funds was simply the lack of transparency that brought me into them in the first place. I had not been informed of this initial sales charge by my Edward Jones broker, or the fact that load fees aren’t at all the norm or industry standard. The lack of transparency, and in turn lack of trust with my advisor, was reason enough to leave these mutual funds for more fee-less pastures at Vanguard.
It also came down to simplicity. As I stated, a Target Date fund accomplishes everything that the jumbled mess of American Funds set out to achieve, but with the simplicity of one succinct package. For new investors who can be intimidated by the sheer amount of acronyms on their account statement, this is no small housekeeping issue. A Target Date fund, or in my case simply VTSAX, is the set-and-forget investment I had been looking for.
All without the load of bullsh*t I had fronted in my American Funds.
First, many people ,( including Management) , do not know anything about Mutual Funds, or what they own ,fees, performance and so on. Second,, Most Financial Advisors are not advisors , they are sales people. Third , employees are forced to invest in Mutual Funds with high management fees and low performance. Forth,, American Funds does not offer Index Funds.
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I have felt American Funds was a mistake for years. I am with Edward Jones and as mentioned by many, I get the finance mumbo jumbo when I question the choice. Using this article, I have presented my rep. (who really does nothing) with a list of questions including load fees, her commissions, etc. We have lost money on our retirement investments every year for the past three years and there is always some kid of explanation with a slight change (that is probably costing me more money). I will follow up with results… thanks for some great information! I think I just need to bite the bullet – sell the funds and get out of Edward Jones!
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So, are you saying that if my employer is offering an SEP IRA match of 5% and the advisor is utilizing American Funds, that 5% match is ultimately load fees?? I’m at a position where I’m ready to start investing (good wage, zero debt) and deciding on Vaanguard or is it even worth to take advantage of my employers plan?
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No, this post is very misleading. American funds offer many different share classes. This article only discusses A share mutual funds which is what you would buy on your own outside your 401k plan.
American funds may have your SEP IRA in a A share mutual fund, and if it does, whoever manages your plan is required to discuss the costs associated with your investments. If they do not disclose theses costs, they are in violation of a multitude or regulations. If you have a self managed sep, you can transfer it to any firm you would like for example vanguard or whoever.
If you in a group plan like a 401k, many of those are offered without a load but in return likely will have a higher internal expense on the mutual fund. Most mutual funds expense ration is anywhere from .25-1.25 % annual. I would contact your plan administrator/advisor and ask them for a fee disclosure. You can also look up the ticker symbol of the funds you have on american funds website and that will also disclose your costs.
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How do you get out of your American funds and into vanguard? I have ROTH IRA and 529 accounts in AF bit I’d like to get them into Vanguard but I don’t know what to do to get out
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You can call Vanguard and have them walk you through it. I did a transfer in kind of my Roth IRA to my Vanguard account and bought VTSAX. You can sell the funds within your Roth IRA, but make sure not to withdraw them out of your Roth and incur taxes and potentially a penalty for early withdrawal.
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You can go on vangaurds website, open a roth IRA first. You can then call vanguard and one of there reps will walk you through the transfer process. It is all done electronically usually in 2-5 business days.
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What about the new American Funds that my broker says are no-loa on the front or the back end? They are sold only through brokers, I believe. Are they an ok investment?
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Hey Rachel–do you know the name of the fund? To be honest I haven’t looked into any of their other offerings because I am scarred from my own experience as a naive investor throwing away 5.75% of my initial portfolio.
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American funds has breakpoints. Meaning, the more you invest, the lower the commission or “load”. For example, if you invest 1 million with American funds they don’t charge a commission to buy. They also look at your whole household. So if you and your husband, 401k etc all have money in American funds “fund family” they add all those up to give you a better pricing group. American funds has some fantastic mutual funds. Growth fund of America for example has outperformed the s&p for over 20 years.
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Load fees were fairly common in the 80s and 90s. American Funds had good performance so investors were OK with it. But today with no load feed index funds and even active funds widely available it makes no sense.
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Absolutely. It does look like American Funds enjoyed some outperformance in the past, which hasn’t been the case over the last 5-10 years. You have to have a LOT of faith in the funds to willingly accept those fees compared to the index these days. Even Cathie Wood’s ARK funds simply charge a higher but reasonable enough expense ratio (0.75%).
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Great article, thanks for sharing. I totally understand that there was a need for fees before we were all self-directed investors with internet connections. Managing investments and trading used to be labor intensive. Not anymore. I’m glad to see the industry evolving, but (as you say) there are some relics that still exist and will syphon your gains away.
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Good point–there used to be reason for some of the high-cost fees (though maybe not 5.75% load fee high), when individual investing wasn’t so readily available. The big issue is that most of those relics that do exist are imposed upon people who don’t know any better, by financial advisors who should know better.
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Nice write up. I completely agree and I am surprised these things still exist. $1,000 in fees!
David over “ochosincoche” recently did a nice write up on another American Fund “AGTHX” and came to a similar conclusion! You should have a look!
Take care!
Max
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I hadn’t seen David’s post but it was so good that I added a link to it above. Same concept but with pretty graphs and articulate writing haha. Really blows my mind that they are still offering these load-fee funds.
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Thanks for linking to my analysis. Glad it was helpful to others beyond my acquaintance. I love the South Park snippet. Unfortunately, instead of inspiring confidence in DIY options, I fear it pushes people to opt out of the market altogether. Vanguard FTW!
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Learning about Vanguard however many years ago has literally been a life changing revelation. I’m an indexer all the way, but for the small chunks of change I allot to other purposes, which usually only serves to reinforce the index fund approach haha.
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Well gosh darn it this is ridiculous! The fees that is. What a rip off! Dave Ramsey is another story. The debt freedom thing we subscribe to but some of the other things he pushes just seem endorsem*nt driven. Not to mention his latest antics. Yeah, we’re good.
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If I had known that wasn’t the norm at the time there is no way I would have invested in American Funds. Ignorance might be bliss, but it’s also expensive!
I would say to anyone that they can let Dave help them get out of debt, but go elsewhere for your general personal finance advice…
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Wow, when you compare American Funds versus Vanguard, it almost criminal to see how much EJ fees are charging. I’m just glad you’re now with Vanguard. Better late than never! I’m also glad you’re not afraid to take shots at Dave Ramsey. I feel like people in the finance world treat him as a God, but you and I see right through some of his B.S.
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Haha I don’t mean to take shots, but I was searching for other articles regarding load fees and nearly spit out my $5 latte when I read that terrible take. Combine that with his recent tone deaf Fox News appearance and I think he earned that little jab from an obscure blogger. I know he’s helped a lot of people, which is obviously great, but it’s even better if he’s merely a gateway into some of the JL Collins/FIRE community type advice.
I am still so bitter about my EJ experience that I am unable to help myself from posting something negative every so often to help shed light on some of their more heinous practices.
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I loved this… “So what are load fees? Well, they’re bullsh*t, is what they are.” Hahaha. Well stated. Way back in the day I started investing with a financial planner that signed me up with American Funds and I paid, I think it was 5.25% load at the time. We’re talking like 2005 or something. I even asked him why I was investing in this if I had to have a 5.25% return just to make me whole (I wasn’t up to date on my finance yet and he didn’t point out I’d actually need more than that, with the right math a 5.5% return simply to break even.) He simply said they were great funds. I didn’t realize at the time it was a sales charge going directly to him. When I started to finally learn finance a few years later, I dropped his ass and told him I was f*cking pissed he basically ripped me off. Like you it was a sunk cost, but I was so irate I sold my sh*t. I can’t believe people can still legally do that sh*t. It’s pathetic.
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Sounds like a nearly identical experience to mine. It honestly should be criminal to charge those kinds of fees. If not criminal, it certainly raises some moral questions about these brokers. When I pulled out of EJ and moved to Vanguard I couldn’t even bear to return my “advisor’s” calls. I felt so betrayed that someone I trusted with these important decisions was preying on my ignorance. Inexcusable and alarmingly pervasive even as index funds have become more accessible.
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i’m glad i never had an advisor or broker. i suspect i would carry around that resentment regarding those fees for a long time. mrs. smidlap had a crappy 401k plan with principle. being a small company with only about a half dozen employees they were kind of at the mercy of 1.5% expense ratios for average funds. she called the local rep who was partly making a yearly gain from this account and the woman told her that was “customary” and pretty much just lied about that. the best thing that happened is when the company shrunk and got rid of the plan and we rolled it to an ira with great success. i would guess we’ve made something like 400% in the past 5 years in that one.
i’m glad you mentioned that cathie wood fund. that’s a good place to look for stock ideas. don’t those fees make you want to go back to the e. jones office and beat them out of that broker/advisor?
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I’ve definitely carried around that resentment, going on 10 years now and still writing angry blog posts about it!
I know a lot of ARK’s recent success was due to Tesla’s crazy run, but Cathie Wood seems to stand out ahead of the pack at the moment.
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