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The Hidden Cost of Back-End Fees, Commissions


A Strategic Insight report released last week points out that traditional point-of-sale commissions for mutual fund sales are close to being extinct. Of all the sales in 2007, 60% occurred without any front-end loads.

"High commissions have become obsolete, but that doesn't mean consumers are better off. They have more options on how to pay advisers, but it's not all as clean and easy as it seems," said Avi Nachmany, director of research at Strategic Insight.

Mutual funds were created with back-end charges in order to find practical solutions to deal with the possibility of rouge brokers, who may promote a certain product out of personal interest. Essentially, investors would be allowed to buy in without an initial commission charge and face carry higher costs over time-but is this actually beneficial in the long run?

A conflict of interest is more than likely with upfront commissions; however, an adviser who gives bad advice is also easily identifiable this way. When an investor has an adviser who constantly goes back and forth, perhaps to seek further commission, this problem can become evident relatively quickly. This is no longer the case.

"The debate on the best way to pay-which clearly favored point-of-sale commissions as being the best deal-has been lost, but having more options is not bad," Nachmany said. "It's just more important than ever that fund customers understand what they are paying, who they are paying and how they are paying, because it's not straightforward any more."

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