Mutual Fund Breakpoints: A Break Worth Taking
Mutual funds often offer discounts on front-end sales charges or loads for larger investments. The investment levels at which the discounts become available are called "breakpoints." For example, a mutual fund might charge you a front-end sales load of 5.75 percent for all purchases of less than $50,000, but reduce the load to 4.50 percent for investments between $50,000 and $99,999, and further reduce or eliminate the sales load for even larger investments.
We are issuing this alert because we are concerned that investors have not received breakpoints discounts to which they're entitled in many instances and that investors are potentially overpaying front-end sales loads. This alert does not apply to no-load mutual funds or to mutual fund share classes that do not charge varying front-end sales loads.
This alert will explain how breakpoints work and what you need to know to make sure you are charged the lowest possible front-end sales load.
How Breakpoints Work
When your dollar amount of mutual fund purchases reaches a specified level, called a breakpoint, you are entitled to pay a smaller sales load. For example, a purchase of $49,500 in mutual fund shares may be charged a front-end sales load of 5.75 percent or $2,846.25, while a purchase of $50,000 in fund shares might be charged a sales load of 4.50 percent or $2,250. In this example, by choosing to invest $500 more in funds, you would have $596.25 more invested in fund assets. Typically, there are several breakpoints, and if you invest more and reach each of these thresholds, the greater the reduction in the sales load.
You may be entitled to a lower front-end sales load based on a single mutual fund transaction if the dollar size of the transaction exceeds one or more breakpoints. In addition, you may become entitled to receive a breakpoint discount based on rights of accumulation or by using letters of intent.
|Sample Breakpoint Schedule|
|Class A Shares (Front-end Sales Load)|
|Investment Amount||Sales Load|
|Less than $25,000||5.0%|
|$25,000 but less than $50,000||4.25%|
|$50,000 but less than $100,000||3.75%|
|$100,000 but less than $250,000||3.25%|
|$250,000 but less than $500,000||2.75%|
|$500,000 but less than $1 million||2.0%|
|$1 million or more||0.0%|
Rights of Accumulation
A right of accumulation (ROA) typically gives you a discount on your current mutual fund purchases by combining both your current and previous fund transactions to reach a breakpoint. For example, if you are investing $10,000 in a fund today, but previously had invested $40,000, those amounts can be combined to reach a $50,000 breakpoint, which will entitle you to a lower sales load on your $10,000 purchase.
Letter of Intent
What if you can't immediately invest the minimum amount necessary to trigger a breakpoint discount? If you are planning to make additional investments over the coming months, you might still be able to obtain a reduced sales charge by means of a letter of intent (LOI). An LOI is a statement you sign that expresses your intent to invest an amount over the breakpoint within a given period of time specified by the fund. Many fund companies permit you to include purchases completed within 90 days before the LOI is signed and within 13 months after the LOI is signed in reaching the dollar amount of the breakpoint threshold. If you expect to invest regularly in a fund with a front-end sales load it's worth finding out if an LOI would help you qualify for a reduced charge.
Caution! If you fail to invest the amount stated in your LOI, the fund can retroactively collect the higher fee.
In the case of either ROAs or LOIs, you usually may credit mutual fund transactions in other related accounts, in different mutual fund classes, or in different mutual funds that are part of the same fund family, toward your discounts. For example, a fund may allow you to get a breakpoint discount by combining your fund purchases with those of your spouse or children. You also may be able to credit mutual fund transactions in retirement accounts, educational savings accounts, or in accounts at other brokerage firms.
Each mutual fund and family of funds set their own breakpoints and conditions for discounts. These terms and conditions differ from one fund to another, and they also can change. You can find information on breakpoints in the mutual fund prospectuses or statements of additional information and on many mutual fund company websites.
There are a number of steps you can take to make sure you are paying the lowest possible price for a fund that charges a front-end sales load:
A Word About Mutual Fund Expenses
Like most investments, all mutual funds charge fees and expenses that are paid directly or indirectly by investors. These fees and expenses can vary widely from fund to fund. Even a single mutual fund, with one portfolio and one investment adviser, may offer different classes of its shares to investors with different fees and expenses depending on the class that you choose. Because even small differences in expenses can make a big difference in your return over time, we've developed a fund analyzer to help you compare how sales loads and breakpoint discounts, fees, and other mutual fund expenses can impact your return.
When You Don't Think You Got a Break You Deserve
If you've already made a mutual fund purchase through your broker, you may want to check your account statements and confirmations to see if you received an appropriate breakpoint discount. If you have any reason to believe that you did not get the right discount, call your broker and request that the discount be applied. In most instances, your account will be quickly corrected. If your broker does not correct your account or provide you with an explanation that you understand, follow up by writing to the firm's compliance department. If you're not satisfied with the firm's response, you can file a complaint online at the FINRA Investor Complaint Center.
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