Under Fire

For decades, we've been sold the notion that long-term investing is the best way to build a nest egg, and that mutual funds are the best vehicle for long-term investing. The fact that funds have been largely scandal-free has helped to cement that perception. The past year, though, has sorely tested that image.

First, securities regulators honed in on Morgan Stanley for using incentives to induce its brokers to sell the company's own mutual funds rather than giving impartial advice to clients. Several brokerages were also nailed by regulators for peddling more lucrative (for the broker) mutual fund Class B shares rather than more affordable (for the investor) Class A shares. And then last fall, we found out some mutual funds were letting the big guys eat into our returns through market timing and late trading schemes that benefited them.

Many investors, especially those with six- or seven-figures accounts, like the hand-holding brokerages can provide. So rather than throw out the broker with the bath water, make sure you ask the right questions before taking the advice of anyone pitching broker-sold fund shares.

If you do invest through a broker, assume you'll be paying a commission. The brokerage might receive front-end sales charges as high as 8.5 percent, but a more typical load is 3 to 5.5 percent. Or it might get back-end loads-typically sold as Class B or Class C shares-which are triggered if you sell during an initial period that could last as long as six years, during which time the fund also compensates the broker by charging higher expenses. Or the brokerage could earn a "wrap" fee for managing your money, typically 1 percent to 1.5 percent of your account value annually for mutual funds.

Ask upfront how your broker gets paid. If you don't get a straight answer, don't give him or her your business. In addition to the basic commission schedule, you should know how much money you have to invest before you get a discount; what classes of fund shares are available; and what additional incentives, if any, the broker and branch manager have to move particular fund families.

Scott Bernard Nelson is an assistant business editor at The Oregonian and a freelance writer in Portland, Oregon.