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 bullshit 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 bullshit, 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 bullshit I had fronted in my American Funds.