Salescharge

Key Takeaways

• A sales charge is a commission paid by investors on mutual fund investments to compensate financial intermediaries, like brokers or advisors.
• Sales charges, often called loads in mutual funds, can be front-end, back-end, or deferred, affecting investment value differently.
• To avoid sales charges, investors can consider no-load mutual funds or ETFs, which often provide more cost-effective alternatives.
• Understanding sales charges is crucial as they can impact investor returns and are not included in a fund's expense ratio.

What Is a Sales Charge?

A sales charge, also called a load, is a fee paid when buying or selling mutual fund shares to compensate the broker, advisor, or other intermediary who handles the transaction. Sales charges come in different forms and can reduce your net return by taking a percentage of your investment. Knowing how these fees work helps you compare funds more accurately and make better choices about what you pay for advice and access.

How Sales Charges Impact Your Investments

Many mutual funds have sales charges, which are quoted in percentages and equate to a portion of the investment. For investors, this means their actual investment in the fund is equal to the difference between the investment value per share and the total sales charge. By regulation, the maximum permitted sales charge is 8.5%, but most loads fall within a 3% to 6% range.

The level of sales charge an investor incurs often depends on the specific share classes of a fund. Charges can vary across different types of funds and share classes, and with some funds are not payable at all due to distributor relationships.

Investors should be sure that they clearly understand the sales charges and other fees associated with a fund. Fund companies typically provide comprehensive disclosure of their sales charges, including in their prospectuses.

It's worth remembering that sales charges do not factor into the gross and net expense ratio of a fund. That's because they are paid to financial intermediaries for their partnership in selling the fund, rather than to fund itself.

Important

Sales charges can be avoided by investing in no-load mutual funds or exchange-traded funds (ETFs).

Types of Sales Charges

Some common types of sales charges include the following:

Front-end sales charges are paid as a percentage of the purchase price at the time of the investment. Class A shares often have front-end sales charges.

Back-end sales charges are paid as a percentage of the selling price at the time of sale. Back-end sales charges are often associated with B-shares of a fund.

Deferred sales charges are back-end sales charges that decline over time, often eventually reaching zero. They are also called contingent deferred sales charges because the fee is contingent on the holding period.

Why Sales Charges Face Criticism

Investor advocates and educators frequently criticize sales charges, with many arguing that they are entirely unnecessary for most investments today.

Sales charges take a bite out of investor returns, and they can be hard to spot. Some of the sales charges associated with B-shares are frequently condemned. For example, suppose that an investor intends to hold a mutual fund for many years and buys B-shares with deferred sales charges. The investor might ignore the sales charges because the desired holding period is long enough for them to go to zero. However, if an emergency arises and funds are needed ahead of schedule, the investor could be hit with a surprising sales charge of 5% or more.

Fortunately, sales charges can be avoided by investing in no-load mutual funds or exchange-traded funds (ETFs). It's important for investors to be aware, though, of the bid-ask spread on ETFs. A high bid-ask spread can be just as bad as a sales charge.

Examples of Sales Charges

Suppose that an investor puts $10,000 in the XYZ mutual fund with a front-end load of 5.75% for small investors. The investor’s actual investment in the fund after the sales charge would be $9,425. However, sales charges are only one of several types of fund fees that investors can reduce or eliminate.

In another case, an investor put $100,000 into the XYZ mutual fund. XYZ still has a front-end load of 5.75%, but they cut it to 4% for investments of $25,000 or more. They also reduce it to 2% for $100,000 or more, and to 1% for over $1,000,000. In this case, the investor's actual investment after the sales charge is $98,000. Notice that although the percentage has fallen, the total amount charged has increased.

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