(Re)introducing Capital Group's American Funds I was aware of the tax differences, but didn't mention it for a couple of reasons. One was that we weren't talking about tax-adjusted figures. The other was because the situation is more complex than you described in case 2 (where the fund pays the advisor).
When funds skim money to pay for expenses, they first take that money first from interest, nonqualified divs, and possibly short term gains that would otherwise be distributed.
If it has enough ordinary income to cover the advisor payments, then what happens is simply that your ordinary income divs are reduced by the amount of the payments. That's equivalent to a straight deduction against ordinary income. The NAV would not be affected by paying this additional cost.
For example, if there's $5 of interest income/share available and the fund pays your advisor $4, then it distributes $1 of ordinary divs and the NAV drops $5. If it doesn't pay your advisor (case 1) then it distributes $5 of ordinary income to you, the NAV still drops by $5.
If the fund reduces its cap gains distributions (rather than its ordinary income distributions) to pay the advisor, then again the NAV is unaffected but now you'll see your cap gains income (as opposed to ordinary income) reduced by the advisor fees. A less valuable income reduction.
The NAV would be affected in the way you described only if the fund had to use assets that it would not otherwise have distributed. That is, if the portfolio did not generate enough income (via interest, divs, net gains), to cover costs, then the fund would have to use actual share value to pay the advisor.
If the NAV were reduced (or its increase diminished), you would indeed be able to capture the expense as a capital loss (or reduced gain). This is a less valuable loss than the two above - first because its is a capital loss vs. a reduction of ordinary income, and second because you'll only recognize it when you ultimately sell your shares vs. a reduced distribution that is recognized now.
So the tax impact in case (2) is quite variable, in both nominal value (ordinary income vs. cap gains) and present value (available in current tax year or only when shares sold).
You are correct about the 2% AGI floor, so the value depends in part on what other misc. deductions you had (e.g. tax prep fees), and whether you are even itemizing.
(Re)introducing Capital Group's American Funds Suppose you have an advisor who charges 1% for managing your account and he gives you two choices for how he'll collect his fee:
1) He'll periodically skim money from your account, let's say on a daily basis, or
2) He'll delegate that to the fund company that will then skim money from the fund on a daily basis and remit it to your advisor
I think you'd agree that your return is the same either way. Same tithing, same schedule, it's just the collection mechanism that's different.
Case (1) is a wrap account with F-2 shares and a 1% fee. Case (2) is a commission-based account with C shares (1% 12b-1 fee, for the sake of argument all going to the advisor).
One would probably expect the returns of those two classes of shares to be reported differently. Therein lies the problem. Your return is the same, the payment to your advisor is the same, and yet one class' returns are different from another, simply because of the payment mechanism.
What this suggests to me is that to the extent possible, one should keep the payment mechanism out of the return data. I want the performance figures to represent how well the portfolio did, not what I paid or didn't pay to my advisor.
We can keep the advisor fees (which as OJ noted can vary) out of the equation for A shares. Unfortunately, they're baked into the equation for B and C shares. Even worse, you've got the reverse problem with B shares - the performance figures understate actual performance. That's because B shares convert to cheaper A shares after some number of years, but the performance figures assume the same higher expenses ad infinitum.
The 30th percentile estimate is likely in error, though I haven't checked. I'm guessing that when you multiplied the ending value by 94.25% (i.e. reducing account by 5.75%), you did not do the same for all the other front end load funds. Their performance figures should have been reduced as well.
FWIW, M* does incorporate the impact of loads in its star ratings. That's why AMECX is 4*, but AMECX.lw is 5*.
Whiskey A Go Go: Make A Toast With This New ETF
More fallout from the DOL fiduciary rule When a combined $58 million in lobbying dollars from the financial industry are targeted to the Senate Finance Committee ( for 2016 PACs and individual campaigns), I do not have to think very hard about whether money talks. Like another poster at MFO, it doesn't take much like this for me to become cynical. It is such an obvious affront.
