Financial Advisor Exposes Mutual Funds

What is a mutual fund?

A mutual fund is basically a group or securities either stocks and/or bonds that are managed by a fund company that has managers assigned specifically to that fund that buy and sell securities within it.  These managers may be analysts and have a CFA designation.  The fund managers try to match or beat the performance of an index. Whether that’s the overall stock market of America, a foreign stock market, a globally allocated portfolio, a balanced or a conservative benchmark.  There is basically a mutual fund for every type of investing.

You might be thinking so far that sounds great, its managed by CFAs, securities are constantly being bought and sold, and there’s always a manager looking over the fund.  Right, so, guess who’s paying that manager and fund company?

You Are!

Let’s go over more of the details:

Share Classes

These are the most common types of funds, A, B, and C share classes

A-Shares have an up-front fee. This becomes less the more money you put in.  Usually this is how it works, when the fee gets lower its called a break point.  You can get these break points only if you invest in funds with the same fund company.  If you invest 100k the fee will usually go from 4.5% down to 3.5% the dollar amount can be in one fund or multiple as long as it’s with the same fund co. then 250k, 500k, and 1M.  There is no upfront fee when you’re buying at 1M, this is what’s called the NAV Net Asset Value.  Basically, this means buying without upfront fees.  So, after the upfront fee is paid, there’s still an annual fee in A-Shares.  However, these are usually lower because you paid that up-front fee already, so you’ll be charged usually .50% a year, to have your money in that fund.  Keep in mind, funds may be different with fees and break points, however this example is/was very common in the industry when I was a financial advisor.

Unfortunately, clients have no idea what a break point is.  What I’ve seen a lot of advisors do is if a client is going to hit a break point they will separate the money into two different fund companies so they can still charge the highest upfront fee without that break.  This is something clients would never be aware about.  Just by reading this post, you will have more knowledge that the vast majority of advisors’ clients.

B-Shares are rarely used any more.  They work the opposite of A.  These are usually for clients with less money that wouldn’t hit a breakpoint.   There is a back-end fee.  If you take your money out of these funds you have to pay a fee.  The longer the time frame, the lower the fee goes, within around 5 + years the fee will be waived.  Think about that, if you want to take your money out you have to pay a penalty.  There is also the ongoing annual fee to have money in the fund. 

C-Shares, Cs are often used.  These do not have an upfront or backend fee, these are usually for investors with shorter time horizons.  They do have higher annual fees though. Usually 1-2% a year.  After a year holding period the funds should be able to be sold, without a fee.

12b1 and management fees

There are actually fees built into these funds that you will end up paying, that are for the fund company to advertise and hire salesmen with. They are called 12b1 fees.  All of the people in the chain need to get paid, from the financial advisor who sells the funds to his boss, and the bank or firm.  To the mutual fund wholesaler, to their boss and the fund company to the fund managers and their assistants.


The reason to invest in these funds is because of the professional management and the assumption that these managers will know when to buy and sell. And that they might be able to outpace the market.

Let’s review that.

Below is the Compound Annual Growth Rate of the S&P 500, the broad American stock market index.  From

 1-1-2010 to 12-31-2019


As you can see, the last 10 years, just investing in this index you would have made 13.5% a year!  (minus a low inflation rate)

You can achieve this buy buying an index fund that tracks the S&P.  There are index funds for everything, basically they are an unmanaged fund that just tracks an index. The main index fund I use has matched the performance of the S&P while only charging me minimal fees. 

Here is an example of the performance and the fees, as of April 2020:

I am matching the performance of the S&P while only being charged 4 basis points on my investment.

As you can see this is clearly the better option. 

(This doesn’t mean it’s the best for you. I am sharing what I use and what works for me.)

Lets use the A-share example and compare with the index fund.

10 year return and fees for a growth mutual fund for 2020:

The returns are the exact same but the with the fees you’re actually making less than the S&P

If you pay the max up-front fee that the fund charges for the year, the managers would have to outpace the S&P by over 6% just for you to break even! This will never happen.  Even if you are buying at NAV you still have the annual fees to cover so in order for it to be worth it for you and to receive some benefit for these active managers they will need to outpace the market year over year by more than their fees for you to see Alpha (The excess return of an investment relative to the return of a benchmark index).

This is extremely unlikely.  The chances of you or your financial advisor putting you in a fund that will consistently outpace the market year over year are about 0%.  When the managers do outpace the market is it because of their skill and knowledge, or are the taking unnecessary risk, or more likely its luck.  It will not happen every year for the life of your investment.


The mutual fund companies employ salesmen called wholesalers.  They are the people that sell the financial advisors on their fund companies.  You can call them to come and explain how a fund works or even to talk to the client for you.  Usually they will come to your firm and try to sell you on the benefits of their funds and why you should put your clients money into them.

Generally, the good wholesalers make very good money around 200k+ a year. They also have expense accounts.  These accounts are to entertain their clients, i.e. the financial advisors.

What they’ll do is come into a large brokerage firm and order catering for all of the financial advisors, lunch and sometimes even dinner.  The bank channel works a little different.  There is usually only one financial advisor at the bank, and when you’re selling a lot of mutual funds to clients the wholesaler is the advisors best friend.

They will come by the bank every couple weeks and take the advisor out to lunch anywhere they want. With that they usually expect more business into their funds, and they get it.

I had a good relationship with a few of these wholesalers and would constantly have steak or sushi for lunch with them.  I would also bring my banker with me who was licensed to sell funds as well.   

We would really take it to the next level. I remember one week we had 4 different wholesalers taking us out to eat. But there were 5 days in the work week.  So, what did we do? We called a new fund company and told them we were interested in their funds and to send out a sales rep. I asked my banker, where should we meet him? Steak, or sushi? Sushi! He yelled. We just had steak. Ok, I told the sales rep meet us at the Japanese restaurant.

After our lunch we were racing back to the office to get to the bathroom. I told him the next client you get, throw about 50-100k into this new fund company.  And he did. That’s how we got consistent high end lunches while we worked at the bank branch.

It was a lot of fun working at the bank and juggling these mutual fund guys around.  At the same time. No clients knew about this free lunch game we played with the fund companies but if they did and the funds met the clients investment objectives there was nothing wrong/immoral/illegal with what we were doing either.

It just goes to back to one of my investing rules.  Just index the overall American market.

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