Legal Definitions - sales load

A sales load is a commission or fee paid by an investor when buying or selling certain investment products, most commonly mutual funds. This fee compensates the broker, financial advisor, or sales agent for their services in facilitating the transaction and providing advice. Sales loads can be structured in various ways, such as a "front-end load" (paid at the time of purchase), a "back-end load" (paid when shares are sold), or a "level load" (an ongoing annual fee).

• Example 1 (Front-End Load):

  An individual decides to invest $10,000 in a mutual fund that has a 5% front-end sales load. When they make the purchase, $500 (5% of $10,000) is immediately deducted as the sales load. This means only $9,500 is actually invested in the mutual fund shares. This example illustrates a sales load because the investor pays a direct fee at the point of purchase to compensate the financial professional who facilitated the investment.

• Example 2 (Back-End Load / Contingent Deferred Sales Charge):

  A different investor purchases shares in a mutual fund that carries a 4% back-end sales load, also known as a Contingent Deferred Sales Charge (CDSC), which declines over time. If the investor sells their shares within the first year, they would pay a 4% fee on the redemption amount. If they wait five years, this fee might drop to 0%. This demonstrates a sales load because the fee is incurred at the time of selling the investment, acting as a deferred commission for the initial sale.

• Example 3 (Level Load / 12b-1 Fee):

  An investor chooses a mutual fund share class that does not have an upfront or deferred sales charge but instead has a "level load" structure. This means a small annual fee, for instance, 0.25% of the fund's assets, is continuously deducted from the fund to cover distribution and marketing expenses, including ongoing compensation for the financial advisor. While not a direct purchase or sale fee, this annual deduction is considered part of the sales load structure because it represents an ongoing charge related to the sale and servicing of the investment.