Definition
The term front-end load is used to describe a commission or sales fee charged when an investment is purchased. Front-end loads are usually associated with mutual funds, but they can also apply to other investments such as insurance policies or annuities.
Calculation
Net Investment = Initial Investment - Front-End Fee
Where:
Front-End Fee = Investment x Front-End Load
Explanation
Also known as a front-end fee or sales charge, a front-end load is a fee or sales commission paid to agents such as stockbrokers and financial advisors. The fee is an up-front administrative charge that is used to pay for transaction costs and the advisor's expertise in selecting the investment.
Typical front-end fees may be as low as 2.5%; FINRA rules state a front-end load cannot be higher than 8.5% of the investment. Mutual funds designated as Class-A shares will charge a front-end load. This one-time fee is charged at the time of purchase, it is not considered when calculating the fund's annual expenses.
There is no empirical evidence supporting the assumption funds charging front-end loads outperform no-load funds. For this reason, investors should carefully consider the value of paying these costs. Mutual funds can also charge back-end loads, which are fees charged when the investment is sold.
Example
Sam has $10,000 that he would like to invest in a mutual fund. The prospectus of Mutual Fund A indicates a front-load fee of 5.0%. The expense associated with the purchase of shares in Mutual Fund A would be:
= $10,000 x 5% = $10,000 x 0.05, or $500
Sam's net investment in Mutual Fund A would then be:
= $10,000 - $500, or $9,500
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