Here’s a letter you don’t expect to get from your fund company in 2020: On April 30, USAA Mutual Funds filed a supplement to its prospectus with the Securities and Exchange Commission and mailed it to shareholders stating that the firm would be “redesignating” each fund’s “Adviser” share class so it would now carry a load, or sales charge, of up to 5.75%.
For years, fund companies have been moving in the opposite direction, offering no-load or waiving loads, the financial advisory model shifted from commission-based brokerage sales (in which the adviser was paid via the loads, rather than the client), to a “fee-only” one, in which the client typically pays a percentage of their assets under management. Such fee-only models were meant to prevent any bias on the adviser’s part as she wouldn’t be incentivized to sell a particular fund to a client to get a commission. Rather, the same fee on total assets—historically 1%, though that is declining—would be collected regardless of the investment.
USAA will still offer its no-load “Investor” share class of funds at brokers for self-directed investors and fee-only advisers. “The impetus of the recent filing to redesignate the Adviser share class offering as Class A is driven by our desire to offer choice to financial advisers and their end clients and the intermediary platforms within which they operate,” says Mannik Dhillon, Head of Product Development & Strategy at Victory Capital, which acquired USAA Funds last July. (Also in July, Charles Schwab announced it would buy the brokerage and managed accounts business of USAA.)
“We are simply responding to inbound requests from our intermediary partners to provide a variety of share class structures that fit their clients’ overall needs, and often a requirement that load A and institutional shares both be available.”
One problem with load funds, historically, has been that there is no incentive for the financial adviser selling them to continue to provide advice once the sale has been completed. The sales mentality it engenders also can lead to what is known as “churn” in clients’ portfolios, in which the adviser keeps buying and selling new funds to generate additional commissions.
Yet the fee-based model is not without faults either. Since historically markets have gone up more than down, an ongoing 1% fee on assets of $10,000 that grows to $20,000 over time means what started as $100 annual fee becomes $200. By contrast, a 5.75% front-end load on $10,000 is $575. If the value of the fund stays flat, it will take 5.75 years of holding it to break even with the 1% annual fee. If the fund’s value rises, the break-even period decreases; declines, increases. The question is will, the adviser who sold you the fund for the load still be providing you the same quality of advice at the end of that period?
For a long time, regulators and industry advocates like Vanguard founder John Bogle felt such loads compromised advisers and that a fiduciary rule requiring advisers put clients needs first would be the death knell of such funds. Now that the Department of Labor’s fiduciary rule is dead instead, USAA’s conversion to “A” shares is a noteworthy comeback.
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May 06, 2020 at 06:30PM
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USAA Marks a Comeback of Load Funds. Here’s Why — and How to Avoid It. - Barron's
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