A growing number of mutual-fund sales are made by financial advisers, but a shrinking number of those transactions are carrying traditional...

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A growing number of mutual-fund sales are made by financial advisers, but a shrinking number of those transactions are carrying traditional point-of-sale commissions.

A new study issued recently by Strategic Insight, a New York-based fund-industry research firm, showed that about 60 percent of all sales through advisers in 2007 occurred without front-end loads. In many cases, commissions were waived, because the fund was sold in a retirement plan, a wrap account or through a registered investment adviser — or the adviser charged a flat advisory fee to put clients into no-load funds.

“High commissions have become obsolete,” says Avi Nachmany, director of research at Strategic Insight, “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.”

Commission sales have an obvious problem for investments, namely that the guy pushing the product gets paid for making the sale, giving the seller a vested interest in closing the deal and then moving on to the next one. Abusive cases attracted attention, which in turn pushed the industry toward other solutions.

As a result, mutual funds were created with back-end sales charges, so-called “level loads” — which carry higher costs forever — and programs allowing investors to buy in without the commission charge.

Countless studies have shown that A-shares — where commissions are paid upfront — tend to be cheaper than other share classes provided the buyer holds the fund for five years.

Further, an adviser giving bad advice tends to be uncovered quickly in a world of front-end commissions; if they persuade a client to make one move, and then go back and alter that decision shortly thereafter, it quickly becomes apparent that their flip-flopping is designed to generate commissions.

By comparison, a fee-only adviser with an unhappy customer may make trades that the adviser would not otherwise suggest, except that standing pat would cost them the business.

For consumers, the focus is no longer “load or no-load” or even “A, B or C shares,” it’s “cost of ownership.” That includes the costs from inside the fund in the form of expense ratios, and then any other costs associated with investing.

For example, an investor who hires a fee-only broker charging an annual fee of 1 percent of assets under management would be tempted to look at that cost separate from their investment dollars. Instead, if they looked at it in the same way they’d think of a 12b-1 fee, they’d be better able to tell whether they are getting “professional management at a reasonable price.”

If advisers charge excessively for their own services, it won’t make much difference if they pick low-cost funds; the investor is still paying too high a price for ownership.

Chuck Jaffe is senior columnist at MarketWatch. He can be reached at cjaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.