Fund Watch

Buy Load Funds Without the Load

A new Web site, InvestForLess, lets you skip the sales charge on funds, for a reasonable annual fee.

By Elizabeth Ody, Associate Editor, Kiplinger's Personal Finance

March 16, 2010

Editor's note: This story has been updated from an earlier version to reflect recent developments.

Score one for investors.

If you ever thought about investing in a terrific fund but didn’t to avoid paying a fat sales charge, you will rejoice at the arrival of a new service that takes the “load” out of load fund. A Web site called InvestForLess allows investors to buy load funds without paying a commission.

InvestForLess is sort of like the Costco of mutual funds. It charges $250 per year for membership in its platform. Once you join, you can buy the “adviser” or “institutional” share classes of funds on its platform for free. This is possible because InvestForLess, despite looking and smelling like a broker, is structured as a registered investment adviser, with Trade-PMR, a broker-dealer, as its custodian. So InvestForLess members will have access to the same share classes that are available to other advisers on the Trade-PMR network. (That InvestForLess has a custodian should also provide some comfort to any investors wary of sending money to a new outfit. As custodian, Trade-PMR takes possession of client assets, facilitates trades and sends out clients’ monthly account statements. By contrast, convicted swindler Bernard Madoff had no custodian and mailed client statements out from his own office).

Sounds peachy, but interested investors should wait for InvestForLess to work out some kinks in its business model before cutting a check. Its relationship with Trade-PMR is so new that a full list of fund offerings isn’t yet available on its site, and the site has yet to start opening new memberships through Trade-PMR.

Web site logistics aren’t the only hurdles InvestForLess has had to navigate. Its business model is controversial, to say the least, as it drastically undercuts all the brokers and advisers who pocket sales commissions, which typically run as high as 5.75% for stock funds.

InvestForLess had originally launched earlier this year on Charles Schwab & Co.’s custodian network, only to be told a few weeks into its existence that Schwab was pulling the plug on the relationship. InvestForLess then turned to Scottrade to fill Schwab’s place as custodian. But after initially giving the thumbs-up, Scottrade pulled a similar flip-flop. Schwab and Scottrade collect sales fees on any load funds purchased directly through their own brokerage platforms. Schwab also serves as the custodian for about 6,000 advisers, many of whom rely on mutual fund commissions as part of their compensation.

Kevin Knull, InvestForLess’s founder, hopes that the site’s troubles are over so that he can get on with his core mission: saving people money on their investments. It’s a cause close to his heart. For nearly a decade, Knull was a top wholesaler for Hartford Financial -- that is, he sold Hartford’s funds, annuities and other investments to advisers and brokers. He says he left feeling disgusted by the high fees pervasive through the industry.

But his wish for smooth-sailing may yet be a dream. Two large load-fund families are reported to have said that they will prevent their funds from being offered on the InvestForLess platform.

In short, you should give InvestForLess some time before opening an account, both to make sure the new custodian sticks around and to ensure that the specific funds you want to purchase will in fact be available. It will be a clear win for investors if InvestForLess can make its business model stick, and it will be one more blow against the increasingly obsolete divide between load and no-load funds. But it hasn’t stuck yet.

• Got a question? E-mail me directly at investing@kiplinger.com. Want to be heard? Leave a reader comment below.

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