What it means
Fund charges come in two broad shapes. A front-end load is deducted from your money on the way in, so less of it gets invested, while a back-end load is deducted on the way out, so you keep the full amount working until you sell.
The formal name for the typical structure is a contingent deferred sales charge, and the word contingent is the important part. The fee depends on when you sell, and a schedule sets out the percentage for each year of holding, commonly starting at around 5% and stepping down to zero after five or six years.
At first glance a back-end load looks better than a front-end one, because all of your money is invested from day one. The catch is that these share classes often carry higher ongoing annual fees, so the total cost over a long holding period can be greater.
Back-end loads shape behaviour, which is partly the point. An investor facing a 4% exit charge is far less likely to sell in a panic, though the same charge can trap someone who genuinely needs their money early.
The important nuance is what the percentage is applied to. Some funds charge on the original amount invested and others on the value at redemption, and if the investment has grown, that difference can be worth hundreds of dollars.
In practice
Real-world examples.
Example
A retiree holds a fund bought eight years earlier and finds the deferred charge schedule has expired. He redeems the full balance with no exit fee at all, which is exactly what the structure was designed to encourage.
Example
A couple needs $20,000 for urgent roof repairs eighteen months after investing. The 4% second-year charge costs them $800, an expense they had not factored in when they chose the share class.
Example
A financial adviser compares two versions of the same fund for a client with a ten-year horizon. The back-end load version has no upfront cost but charges 1% more annually, so the adviser recommends the front-load version instead.
Think of it
“Back-end load is sales charge when you sell-commission paid when leaving.
Formula
Calculation
Back-End Load Charge = Redemption value x Applicable load percentage from the schedule
Priya invests $50,000 in a fund whose contingent deferred sales charge runs 5% in year one, 4% in year two, 3% in year three, 2% in year four, 1% in year five and nothing after that.
By the end of year three the holding is worth $62,000, and she decides to sell.
Charge: $62,000 x 3% = $1,860.
Proceeds: $62,000 - $1,860 = $60,140.
Had the fund instead applied the charge to her original investment, the calculation would be $50,000 x 3% = $1,500, leaving $60,500, a difference of $360. And had she waited until year six, the schedule would have reached 0% and she would have received the full $62,000.Case study
Seen in the real world.
Havenridge Advisory is an illustrative advice firm created to show how back-end loads play out in practice. It reviewed 60 client portfolios and found that a third held deferred sales charge share classes bought more than a decade earlier.
For clients who had held on, the outcome was fine: the exit charges had long since fallen to zero. The problem was a smaller group who had needed money in years two and three and had paid between $600 and $2,100 each in exit charges, on portfolios that had also been paying an extra 0.9% a year in ongoing fees.
In this fictional review the firm changed its process so that any client with a plausible need for money inside five years would be steered away from back-end load classes entirely. It also began showing clients a simple table of the charge schedule year by year, so nobody would be surprised at the point of sale.
Watch out
Common mistakes.
- Assuming no upfront fee means no fee. The cost has been moved to the exit and often topped up with higher annual charges.
- Forgetting that the schedule usually runs from each individual purchase date. Money added later can still be inside its charging window even when the original investment is free to sell.
- Comparing funds on the load alone. The ongoing annual charge usually matters far more over a long holding period.
Questions
People also ask.
Does a back-end load apply if the fund has lost money?
Generally yes, because the charge is calculated on the redemption value or the original amount rather than on any gain.
Can a back-end load ever be waived?
Many funds waive it in specific circumstances such as death of the holder, and some allow a small percentage to be withdrawn each year charge free.
Is a back-end load the same as an exit fee or redemption fee?
They are similar, but a redemption fee is often a short-term penalty paid back into the fund itself, whereas a back-end load pays the distributor.
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