Front End Fees

Financial Dictionary -> Investing -> Front End Fees

Just as the name implies, front end fees are the fees paid by a borrower to a lender at the beginning of a loan transaction. These fees are not limited to borrowers in a loan transaction. They also are charged to investors who invest in equity or property trusts and some types of mutual funds. In either case, a disclosure must be made that a fee is being charged.

As a person might suspect, front end fees vary substantially. The nature of the investment or loan is a good indicator of the amount charged. However, it is advisable to always check what amount will be asked for, or applied, in your particular situation. By the way, front end fees is also called front-end loading. Either way, it is the fee, or money amount, that is imposed at the initial point of purchase. A product licensing fee is an excellent example of a business type of front end fee. Businesses pay this fee up front because the profit potential far exceeds the minimal amount requested up front to handle the product.

Front-end loads/fees charged in the investment arena are most often paid to intermediaries such as financial planners, brokers, investment advisors, etc as sales commissions. The sales commissions are considered as income by the financial intermediaries. Regardless, the front end fee is still an expense to the borrower/investor.

In the case of mortgage brokers, the front end fee is paid by the borrower while the "back-end" fee is paid by the lender. It is legal in most jurisdictions for a mortgage broker to receive both front end and back end fees in a transaction as long as the proper disclosures have been made to the borrower.

Front end fees have the propensity to look like they would be the most expensive of the two types of fees. However, many researchers have proven that, in most cases, it matters not if the person pays an up front or a back end fee. The results of the investment do not depend on the type of fee they charge.