Subject: Mutual Funds - Buying from Brokers versus Fund Companies

Last-Revised: 28 Dec 1998
Contributed-By: Daniel Pettit (dalacap at dalacap.com), Jim Davidson (jdavidso at xenon.stanford.edu), Chris Lott (contact me), Michael Aves (michaelaves at hotmail.com)

Many discount brokerage houses now offer their clients the option of purchasing shares in mutual funds directly from the brokerage house. Even better, most of these brokers don't charge any load or fees if a client buys a no-load fund. There are a few advantages and disadvantages of doing this.

Here are a few of the advantages.

1. One phone call/Internet connection gets you access to hundreds of funds.
2. One consolidated statement at the end of the month.
3. Instant access to your money for changing funds and or families, and for getting your money in your hand via checks (2-5 days).
4. You can buy on margin, if you are so inclined.
5. Only one tax statement to (mis)file.
6. The minimum investment is sometimes lower.

And the disadvantages:

1. Many discount brokerage supermarket programs do not even give access to whole sectors of the market, such as high-yield bond funds, or multi-sector (aka "Strategic Income") bond funds.
2. Most discount brokers also will not allow clients to do an exchange between funds of different families during the same day (one trade must clear fist, and the the trade can be done the next day).
3. Many will not honor requests to exchange out of funds if you call after 2pm. EST. (which of course is 11am in California). This is a serious restriction, since most fund families will honor an exchange or redemption request so long as you have a rep on the phone by 3:59pm.
4. You pay transaction fees on some no-load funds.
5. The minimum investment is sometimes higher.

Of course the last item in each list contradict each other, and deserve comment. I've seen a number of descriptions of funds that had high initial minimums if bought directly (in the $10,000+ range), but were available through Schwab for something like $2500. I think the same is true of Fidelity. Your mileage may vary.

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