Definition
The term back-end load is used to describe a commission or sales fee charged when an investment is sold. Back-end loads are usually associated with mutual funds, but they can also apply to other investments such as annuities and employer sponsored retirement plans.
Calculation
Net Investment Value = Investment Value at Sale - Back-End Fee
Where:
Back-End Fee = Investment Value at Sale x Back-End Load
Explanation
Also known as a back-end fee or deferred sales charge, a back-end load is a fee or sales commission paid to investment agents such as stockbrokers, and financial advisors. The fee is an administrative charge used to pay for transaction costs and for the advisor's expertise in selecting the investment.
Typical back-end fees are in the range of 3 to 6% of the investment's value. Mutual funds designated as Class-B shares will charge a back-end load. These fees are used to discourage churn, or the early sale of a fund, since the fee usually diminishes over time. For example, a 5% back-end load might apply for five years and reduce by 1% each year. The fund's prospectus will outline the fee schedule as it applies to a withdrawal of funds from the account.
There is no empirical evidence that funds charging back-end loads outperform no-load funds. For this reason, investors should carefully consider the value of paying these charges. Mutual funds can also charge front-end loads, which are fees levied when the investment is purchased.
Example
Over the last three years, Sam's investment in Mutual Fund B has grown to $20,000. Mutual Fund B charges a 5% back-end load that diminishes 0.5% each year over the course of 10 years.
Sam needs money to pay off a loan, and he plans to withdraw all of the funds in the account. The remaining obligation on the back-end load would be:
= 5% - 0.5% x 3 years, or 3.5%
The back end fee would then be:
= $20,000 x 3.5% = $20,000 x 0.035, or $700
Sam's net investment value in Mutual Fund B, after paying this charge, would be:
= $20,000 - $700, or $19,300
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