What is a 'Front-End Load'
A front-end load is a commission or sales charge applied at the time of the initial purchase for an investment, usually with mutual funds and insurance policy purchases. It is deducted from the investment amount and, as a result, lowers the size of the investment. Front-end loads are paid to investment intermediaries, such as financial planners, brokers and investment advisors, as sales commissions; as such, these sales charges are not part of a mutual fund's operating expenses.
BREAKING DOWN 'Front-End Load'Some argue a load is the cost investors incur for obtaining an investment intermediary's expertise in selecting appropriate funds. It is a matter of record that load funds do not outperform no-load funds. Generally, the sales charge on a load mutual fund is waived if such a fund is included as an investment option in a retirement plan such as a 401(k).
Front-end loads are assessed as a percentage of the total investment or premium paid into a mutual fund, annuity or life insurance contract. The percentage paid for the front-end load varies among investment companies but typically falls within a range of 3.75 to 5.75%. Lower front-end loads are found in bond mutual funds, annuities and life insurance policies, while higher sales charges are assessed for equity-based mutual funds. As an example, an investor who invests $10,000 in the American Funds Growth Fund of America mutual fund pays a front-end load of 5.75%, or $575. The remaining $9,425 is used to purchase shares of the mutual fund at the current share price.
How Front-End Loads Compensate Intermediaries
When mutual fund investments and annuities were first introduced to the market, investors were only able to access them through financial advisors or licensed brokers. The front-end load concept was created in an effort to provide compensation to financial intermediaries who assisted investors with purchasing shares. In the current investing environment, the lion's share of the sales charge is paid to the investment company or life insurance carrier offering access to the investment. The remaining portion of the front-end load is paid to the investment advisor or broker who facilitates the trade. Investments that assess a front-end load do not charge an additional fee for redemption of shares previously purchased, although trading fees may apply. Similarly, the majority of front-end load investments do not charge investors an additional sales charge when shares are exchanged for a different investment as long as the new investment is offered by the same fund family.