When clients walk into a Bank of America branch or log into their Merrill Edge account, they are met with a vast universe of investment options. Central to this universe are mutual funds, many of which carry the “BAC” or “Merrill” name. In my experience, investors often conflate the bank itself with the funds it offers, leading to confusion about costs, performance, and alternatives. Bank of America is not a monolithic fund manager; it is a distributor, a platform, and, through its Merrill Lynch subsidiary, a fund family sponsor. Understanding this distinction is the first step to making an informed decision on their platform.
Today, I will demystify Bank of America’s mutual fund ecosystem. We will explore the different types of funds available through their channels, analyze the pros and cons of their proprietary products, and provide a clear-eyed framework for evaluating whether a BofA-affiliated fund is the right choice for your portfolio.
Table of Contents
The Two Faces of BofA: Distributor vs. Issuer
This is the most critical concept to grasp:
- BofA as a Distribution Platform: Through its Merrill Edge online brokerage arm, Bank of America offers access to thousands of mutual funds from hundreds of external fund companies like Vanguard, Fidelity, T. Rowe Price, and BlackRock. In this role, BofA is a storefront. They may charge a transaction fee to buy these third-party funds unless they are part of their “No-Transaction-Fee” (NTF) network.
- BofA as a Fund Issuer (Through Merrill Lynch): Bank of America’s wealth management division, Merrill Lynch, has a long history of creating and managing its own proprietary mutual funds. These are the funds that often have names like “Merrill Large Cap Equity Fund” or “BAC Focused Blackrock Global Allocation Fund.” When you invest in these, you are buying a product manufactured and sold by BofA’s own subsidiary.
The Merrill Lynch Proprietary Funds: A Deep Dive
The proprietary funds are often the ones that require the most scrutiny. They typically come in multiple share classes, each with different fee structures aimed at different types of clients.
Common Share Classes and Their Meanings:
- Class A Shares: Typically charge a front-end sales load (e.g., 5.25%) but have a lower ongoing expense ratio. This share class is designed for investors who work with a financial advisor who is compensated by that initial commission.
- Class B Shares: Typically have no front-end load but charge a higher ongoing expense ratio and a “contingent deferred sales charge” (CDSC), or back-end load, if you sell within a certain number of years.
- Class C Shares: Usually have no front-end load and a level CDSC (e.g., 1% if sold within one year), but they charge a higher ongoing expense ratio than Class A shares. This is often the most expensive share class over the long term.
- Class I Shares: “Institutional” shares. These have no sales load and the lowest expense ratio of all. However, they are reserved for institutional investors and high-net-worth individuals, often requiring a minimum investment of \text{\$1,000,000} or more. They are sometimes available in 401(k) plans where the plan’s aggregate assets meet the high minimum.
The Performance Question:
The key question for any proprietary fund is: Has its performance, net of fees, justified its cost compared to a simple, low-cost index fund?
The data, consistent with the broader active management industry, suggests that most struggle to consistently outperform their benchmarks over long periods. The higher expense ratios and potential sales loads create a significant hurdle that many managers cannot overcome.
The Merrill Edge Platform: Access to the Whole Market
For the self-directed investor, the Merrill Edge platform is a powerful tool. Its value lies not in its proprietary funds, but in its access to a wide range of other options.
- No-Transaction-Fee (NTF) Network: Merrill Edge offers a list of funds from other companies that can be bought and sold without a brokerage commission. This is where you can find excellent low-cost index funds from providers like BlackRock (iShares) and State Street (SPDR ETFs).
- Transaction-Fee Funds: You can still purchase any fund on the market, but for a fee (e.g., \text{\$49.95} per trade). It is rarely cost-effective to buy a transaction-fee fund unless you are making a very large, lump-sum investment.
The Preferred Rewards Program:
A significant advantage for Bank of America clients is the Preferred Rewards program. By maintaining a balance of \text{\$20,000} or more in combined BofA/Merrill accounts, you qualify for tiered rewards, including a 5% to 100% boost on credit card rewards and, most importantly for investors, a reduction in mutual fund transaction fees. At the highest tier, transaction fees can be waived entirely, making the platform much more cost-effective.
A Comparative Cost Analysis
Let’s illustrate the cost difference with a hypothetical investment of \text{\$50,000}.
- Scenario A: Merrill Proprietary Fund (Class A Shares)
- Front-End Load: \text{\$50,000} \times 0.0525 = \text{\$2,625}
- Amount Actually Invested: \text{\$47,375}
- Annual Expense Ratio (e.g., 0.75%): \text{\$47,375} \times 0.0075 = \text{\$355} per year
- Scenario B: iShares S&P 500 ETF (IVV) on Merrill Edge (NTF)
- Front-End Load: \text{\$0}
- Amount Actually Invested: \text{\$50,000}
- Annual Expense Ratio (0.03%): \text{\$50,000} \times 0.0003 = \text{\$15} per year
The cost disparity is immense. The proprietary fund starts with a \text{\$2,625} handicap and costs over 20 times more annually to own. This is the hurdle its managers must overcome just for the fund to break even with the index option.
An Expert’s Framework for Evaluation
If you are considering a BofA or Merrill Lynch mutual fund, ask these questions:
- What is the Total Cost? Combine any sales load with the annual expense ratio. What is the total dollar amount you will pay?
- What Share Class am I In? Why has this share class been recommended? Do I qualify for a lower-cost share class (e.g., through breakpoints or a different advisory arrangement)?
- What is the Benchmark? What index is this fund supposed to beat?
- What is the Long-Term Performance vs. the Benchmark? Look at 5 and 10-year performance, net of fees. Has it consistently outperformed? Or has it lagged?
- What is the Alternative? Is there a low-cost index fund or ETF on the Merrill Edge NTF list that provides similar exposure? Compare the performance and cost of that alternative.
Table: BofA Mutual Fund Decision Matrix
| Consider if… | Be Cautious if… |
|---|---|
| It is a low-cost index fund in the NTF network. | It is a proprietary fund with a sales load (Class A, B, C). |
| You are in a high-tier Preferred Rewards program, waiving fees. | The long-term performance (10+ years) lags its benchmark. |
| You are using it in a 401(k) where Institutional shares are available. | The expense ratio is above 0.50% for a core equity strategy. |
| You have a specific, tactical need not met by a cheaper ETF. | You are unclear on the difference between the fund and the platform. |
The Final Verdict: Platform Over Product
Bank of America’s true value for mutual fund investors lies in its Merrill Edge platform, not necessarily in its proprietary Merrill Lynch funds. The platform provides excellent access to a wide array of low-cost, high-quality investments from other providers.
While some Merrill proprietary funds may have strong historical performance, the burden of proof is on the fund—and the advisor recommending it—to demonstrate that its potential for outperformance is high enough to justify its significantly higher costs. For the vast majority of investors, building a core portfolio using low-cost ETFs and index funds available through the Merrill Edge NTF network is a more reliable path to wealth accumulation. As always, the key is to look past the brand name and focus on the unabridged story told by fees and long-term performance.
