Back-end loads: How to avoid being stung with hidden fees as an expat investor

A “load” is a fee that is applied when trading funds and is calculated as a percentage of the investment amount to the advisory firm either when the investment is made (front-end load) or when the investment is sold (back-end load).

A back-end load is a fee that is applied to an investment product as a percentage of the final investment when you come to sell or realise the investment. The back-end load will be a percentage of the final sale value.

For example, if you initially invested £50,000 and your investment had a 5% back end load, if your investment rose to £60,000 and you decided to sell, you would have to pay £3,000 to the fund company or adviser. In this scenario, your gain would be only £7,000, or a 17% gain instead of 20%.

Are back-end loads legitimate?

Back-end loads apply to a wide range of investment products including life insurance policies, annuities and, more traditionally, mutual funds. They are primarily used by advisors and fund managers as part of the fee advisory fee, although only applied at the point of redemption.

The intended purpose of back-end loads is to discourage investors from regularly trading/selling their investment. After all, to make the investment worthwhile, the gain would need to exceed the back-end load amount to make the investment profitable.

However, they can also be used by firms to earn additional fees at the end of the transaction, on top of the fees paid while the funds were under management.

Back-end loads are generally accepted as a legitimate fee option in fully regulated markets such as the UK providing they are declared and incorporated into the decision-making process.

In regulated markets, back-end loads will always be clearly stated in the investment prospectus or clarified in any recommendations and can therefore be considered when making an investment decision. Failure to do so could mean that the adviser and firm could face punishment and the investor could receive compensation if mis-selling is proven to have occurred.

How back-end loads are being used to mis-sell financial products to expats

Back-end loads as hidden fees

However, as expat investments are generally unregulated back-end loads are increasingly being used by unscrupulous financial advisers as a hidden fee with the back-end load hidden in small print and not highlighted as part of the fee structure making investments far more expensive than is apparent when making the original decision.

Where back-end loads are hidden the financial adviser can make an investment option look significantly cheaper in the first instance enabling them to sell a product that ultimately ends up far more expensive further down the line.

Using back-end loads to keep investments under management

Once the back-end load becomes apparent, there is also an immediate deterrent for the investor to change their mind.

For example, if you made the investment 6 months ago, realise that you made a mistake and then discover there is a back-end load to be applied when you want to exit the investment of, for example 5%, your funds are going to be significantly reduced if you decided you wished to exit.

Under this behaviour an adviser therefore keeps the funds under management and will potentially continue to earn commission, as well as fees paid by the investor.

How to avoid back-end loads

Ultimately, the onus is always on the investor when making a decision about any investment, regardless of whether there are regulations offering protection or not.

However, once the protections are removed for expat investors, the individual must be even more cautious about any investment decision and therefore every aspect of every contract should be thoroughly read and understood.

A back-end load that is intentionally hidden will not be obvious and when they are mis-used it is only when it is too late that the additional fee will be identified. Unfortunately, once an agreement is made it can be near impossible to avoid the back-end load or exit fee.

Therefore, *before* signing or agreeing to any investment clarification must be sought either from the financial adviser or from an independent third party who can review what has been offered and provide sanity check.

Always read any contracts in full, ask as many questions around the fee structure as possible and if anything appears too good to be true, always seek a second opinion as there may be something that you are not being told.

Unfortunately, even the most experienced investors can end up being the subject of unwanted hidden fees, so be sure to know what you are agreeing to before you sign anything.

Request a free consultation with an independent financial adviser

If you are considering making an investment decision and would like a second opinion - or believe you may be the victim of hidden fees, the independent advisers in our network may be able to help.

To request a free consultation, simply enter your details using the form and we will review your information and handpick the most suitable independent adviser who we will then ask to arrange a free consultation with you directly.

During the consultation you will be able to ask general questions about your situation and receive independent advice from an expert and hopefully help you understand any fees or charges and offer guidance about your options.