Buying an investment fund may incur a sales charge (although today this should not be the case). Depending on your route to the purchase: platform or direct.

A back-end load/charge fund structure gives the appearance of a “no sales load” fund, but it is actually a full sales load fund in disguise, with financial advisers paid a sales fee of 5% too 8% by the fund up front.

This disguise is supported by a lack of transparency which enables the sales process for back-end load funds to be based on a client proposition of “no subscription charge and a redemption/exit charge which reduces annually and disappears altogether after five years”.

This can be positioned as an immediate up-front saving of 5% on the published subscription fee, with 100% of the investor’s money buying shares in the fund. It also holds out the appealing prospect of combining that discount with no exit fee if the fund is held for over five years.

This is a proposition which offshore financial advisers find relatively easy to sell and which is supported by the literature produced by these funds.

These ‘loads’ are effectively sales fees which are used to remunerate offshore financial advisers selling funds to retail investors.

Research show that, in virtually every instance, a front-end load share class will outperform the equivalent back-end load share class by at least 10% over three years. It is clear that the longer the back-end load share class is held, the bigger the gap between front-end and back-end performance. While the impact on a financial adviser’s remuneration is neutral.

It will seldom be in the best interests of the investor to place their money into the back-end load share class rather than the front-end load share class

A quantitative comparison of the front and back-end load share classes of prominent funds in the offshore (which have both share classes) confirms that back-end load funds generally produce poorer returns for investors.

This is most pronounced when the fund classes have been established for three years or more, as this gives a fairer indication of the compounding effect if higher annual charges over time.

Spoting a back end charge

If there is a term or period of time that the fund needs to be held then there is back-end load/charge.