Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Back-End Load

What it is:

A back-end load is a fee paid to sell a specific investment. It is expressed as a percentage of the amount invested, and may also be called a contingent deferred sales charge, an exit fee, or a redemption charge. Back-end load mutual funds are often referred to as B Shares.

When mutual funds first became popular, most could be purchased only through brokers or financial advisors. As the number and popularity of mutual funds increased, no-load and back-end-load funds soon became the norm.

How it works (Example):

Back-end loads are commonly assessed on the beginning value of the investment, although some companies calculate the fee on the ending value if the share price is lower than the original purchase price.

Let's assume you make a $10,000 investment in the Company XYZ mutual fund, which has a 4% back-end load. The presence of the back-end load means that the investor must pay a $400 fee upon the sale of the investment ($10,000 x .04). Ideally, the earnings from the investment should more than make up for the back-end load. In this example, the back-end loaded fund must therefore return 14% in one year to reach $11,000 in value after the fee, but the no-load fund must only return 10% to do so.

Generally, back-end loads are reduced for each year the investor holds the investment. If the investor holds the investment long enough, i.e. for the duration of the surrender period, many fund companies waive the back-end fee. For example, a back-end fee might be 5% in the first year, 4% in the second year, and so forth until the fee is zero. Additionally, some fund companies automatically convert B shares to A shares after the surrender period.

Why it Matters:

Loads discourage investors from frequently trading their mutual fund shares, an activity that requires mutual funds to have considerable amounts of cash on hand rather than invested. Generally, however, a load is considered payment for the broker's expertise in selecting the right fund for the investor. Notably, there is considerable controversy about whether back-end load funds perform better or worse than other types of funds.

Back-end loads are most often associated with mutual funds, but annuities, partnership interests, and life insurance investments may also have back-end loads. Mutual funds must disclose back-end loads and other fees in their prospectuses, and it is important to understand that a back-end load is only one of several types of fees that may be charged. Thus, when comparing investments, investors should evaluate all fees associated with an investment, not just the size of the back-end load. Additionally, the nature of the investment, the investor's risk tolerance, and the investor's time horizon should always be considered when evaluating any investment.