Q. In a recent column you discussed "screening" techniques when selecting mutual funds. One restriction you mentioned in your analysis was the exclusion of loaded funds. In the past my financial planner has almost exclusively recommended no-load funds. Recently, I was introduced to a different financial planner and though that it would be a good exercise to obtain a second opinion. This financial planner recommends loaded funds for virtually any investment I plan on holding 5 years or more.

Do loaded funds make more sense when the fund is held for longer periods of time?

---C.B., by e-mail from Dallas

  

A. Unless the first financial planner was a fee-only planner, one of a small group that charges on an hourly basis for services, the odds are you have been buying load funds all along. I say this with confidence because every financial planner has to make a living somehow and the most common method is some form of sales commission.

The first planner was probably selling you fund "B" shares. These are shares that are sold without a front-end load. Instead, a hefty 12b-1 fee is added to the annual expense ratio for the fund. If the funds are redeemed in a short period of time you will be charged a redemption fee that will help the selling company recoup its marketing costs, which include a commission to the financial planner.

The second planner was probably selling you "A" shares. These are shares that are sold with a front-end load. Since they don't have to recover the marketing expense, these funds have much smaller 12b-1 fees and cost less per year to own.

The primary reason we now have over 17,000 mutual funds is that most funds are now marketed through multiple "channels," each with its own marketing structure. The broker distributed fund group that I most admire, for instance, is American funds. If you buy their Amcap fund "A" shares you will pay an upfront commission of 5.75 percent on a small purchase. (The commission rate declines as the investment increases and disappears altogether at $1 million.) and you'll own a fund with an annual expense ratio of only 0.73 percent, including the 0.25 percent 12b-1 fee.

If you buy the same fund "B" shares, however, you won't pay any commission up front but you'll face an annual expense ratio of 1.50 percent, including a 12b-1 charge of 1.00 percent. Most "B" shares carry the extra 12b-1 charge for a period of 5 years. In the sixth year you can convert to "A" shares and the 12b-1 extra charge is dropped. Basically, it's just two different ways of paying the sales and marketing costs. The long-term difference is minor.

What does make a difference is the total cost burden you face over a long period of time. Over the ten year period ending September 31, for instance, the Morningstar database tells us that the load adjusted annualized return of the Amcap "A" shares was 12.04 percent while the load adjusted annualized return of the Amcap "B" shares was 11.85 percent--- only 19 basis points.

Both funds have a core expense ratio of only 0.73 percent, less than half the industry average for domestic equity funds of 1.51 percent. As I have pointed out many times, over long periods of time fund management expenses will directly reduce your return.

  

Q. I've recently stumbled across scammy-looking ads for "Becoming your own banker" by buying "dividend-paying whole life." I'm assuming the catch comes in the form of up-front sales charges and fine print that destroys the buyer's ability to invest wisely. Am I reading this right?

Are there reasonable alternatives, such as a loan from my 401(k)? This is important because I'm carrying $25,000 in credit card debt. It's at low rates but still way too much and payoff is progressing slower than I'd prefer. I have $65,000 in the 401(k), plus about $30,000 in a variable life that has a loan option.

---SB, by e-mail from Dallas

  

A. There is a book by that title written by R. Nelson Nash. A self-published book not available in bookstores, it is available as an 84 page digital download from www.qualitybooks.com for $16.95. I would not be surprised if there were many people offering courses based on the content of the book, just as there are many people offering courses in debt reduction.

The book shows how to use high premium whole life policies to build cash value that can be used as your own personal bank to finance virtually anything you might want to finance. In each case you pay yourself (to the policy) what you would otherwise have paid to the bank or lender. The biggest impediment to implementing the plan is that most people want to spend money on things today rather than build cash value in whole life policies so they can spend money tomorrow.

And that, sadly, is why this program won't work for your. Before you can become your own banker you must first make large deposits in a whole life insurance policy. So you'd have to service your credit card debt and make those large deposits at the same time. Most people would be unwilling (or unable) to reduce their personal consumption enough to do that.

Your $25,000 credit card debt, however, is about what the average new car costs. Instead of borrowing from your 401(k) or variable life policy, why don't you examine your spending habits and figure out how you can find $634 a month--- what you'd pay on a 48 month car loan at 10 percent? You can start by not paying premiums on your life policy and using the money to make payments on your credit cards. The "return" will probably be better than the return on your investment choices.

There is no magic and painless way to eliminate debt. When you borrow money you are consuming tomorrow's income as well as today's income. The only way to get out of debt is to consume less and devote the money to debt reduction. Eliminating debt will eventually allow you to consume more because you'll eliminate the burden of interest.

  

Q. I have been following the Couch Potato investing method for seven years. But I struggle with one issue. If I invest directly in a company it is my fiduciary responsibility to oversee the management of that company. I need to vote the proxy, voice dissension (when needed) and ultimately sell if I lose confidence.

With index investing this does not occur. At best an index fund should abstain from all votes. If everyone, including insiders, invested in all companies via an index, then only the insiders would control the proxies. They would be able to vote themselves a raise (or worse) whenever they so desire. How does a responsible index investor come to grips with this dilemma?

---B.A., by e-mail

  

A. Interesting question--- with several answers. First, index investing may be growing but it is a long, long way from dominating the capital markets. Second, there is little evidence to support the notion that shareholder voting influence on behavior in the executive suite, particularly in the area of compensation. As a consequence, I think we have three very different alternatives.

•  We can grasp the heart of index investing and assume that human activity creates more value than it destroys and that it will be reflected in the index. This will occur regardless of the number of warts in the boardroom. History indicates this is a good bet.

•  We can narrow our field of investing to companies that pass muster with social screening. A rarity 25 years ago, there are now 202 "socially conscious" funds. The Vanguard Calvert Social Index Fund, for instance, is limited to stocks in the Calvert Social Index. The fund (ticker VCSIX) has a minimum investment of $3,000 and has an annual expense ratio of 0.25 percent. Over the last 3 years it has ranked in the top 23 percent of all large growth funds. The largest socially conscious fund is Ariel (ticker: ARGFX), a $3.4 billion fund that specializes in small cap value stocks. It has a minimum investment of only $1,000 and an expense ratio of 1.10 percent.

•  We can "tend our own gardens" and concentrate on direct personal investments that fulfill the demands of conscience. This could include rapid pay down of the mortgage on an energy efficient home, ownership of a hybrid automobile and energy efficient appliances, and direct investment in a small business.

  

Q. What is the down-side to interest-only mortgages for someone in her mid-seventies with no dependents, no need for equity? Her stock portfolio amounts to about $200,000 and her other assets, including home equity, automobile, furniture, and household goods, clothes, furs, and jewelry amount to about $150,000. She is in excellent health, still working, exercises and eats right and will probably live 10-20 years longer, given family history. She has long-term care insurance and Social Security. She would like to lower her monthly payments. Is there a danger of the interest being raised higher than the 6.25 percent she is paying now?

---J.S. by e-mail from Dallas

  

A. Health is a vital asset but furniture, household goods, clothes, furs and jewelry aren't. They are expensive to replace but they don't produce income. Every dollar you have tied up in personal capital is a dollar that could be earning dividends or interest. The fastest way to learn the true value of any item of personal capital is to try to sell it.

Basically, she has margined her financial assets by hocking her house. She could just as easily margin her financial assets at the brokerage house and pay off her home mortgage. The margin loan would be interest-only and it might have a relatively low interest rate.

The risk in both cases is that interest rates can rise. When they do, the value of both financial assets and houses tends to decline. Equally bad, the cost of servicing the loan will rise, squeezing out regular expenses like home maintenance, meals out, and other discretionary spending.

The best option is to pay liquidate some financial assets and pay the mortgage down to a level where the monthly payment is small to non-existent. Then she can see what her real assets are.