Understanding Mutual Fund Breakpoints
The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), which regulates brokerage firms, have sought to ensure that mutual fund investors are charged the correct sales charges on mutual fund transactions. The Investment Company Institute fully supports these efforts and is pleased to offer this guide to help investors understand sales charge discounts and ensure that they are receiving the appropriate sales charge discount, also known as the “breakpoint discount,” on their mutual fund purchases.
4 Things You Can Do to Ensure You Receive Proper Breakpoints1. Review your fund’s breakpoint schedule. The breakpoint schedule will only apply to those investors who are charged a sales charge at the time they purchase mutual fund shares. The fund’s sale charge schedule typically is included in the fund’s prospectus but may also be found in the fund’s “Statement of Additional Information.” You can also request this information from your broker or financial adviser. In addition to disclosing the sales charge discounts that are available to you, this information will tell you which of your family member’s accounts may be counted to determine your level of discount. 2. Make sure you know what investments you and your family members hold. Discounts may be based on total holdings of a particular fund complex’s investments. Accordingly, in determining your holdings, be sure to include eligible investments in all of your brokerage accounts, mutual fund accounts, retirement accounts, and 529 college savings plans as well as in the accounts held by your family members. 3. Keep your financial professional in the loop. Make sure your broker or financial adviser knows about all of your mutual fund holdings, as well as those of your family members, both inside and outside of retirement accounts. And don’t forget to include purchases made with the assistance of other brokers or directly through the fund company. 4. Read your account statements. After you purchase a mutual fund with a front-end sales load, follow up to see that any applicable breakpoint discounts are correctly applied. In the first account statement you receive after making a mutual fund purchase, look for sales charges. If the sales load you’re being charged doesn’t match the one outlined in the fund’s breakpoint schedule, contact your broker or financial adviser. |
What You Should Know About Breakpoints
What are breakpoints?
Many mutual funds that are sold with sales charges (or “loads”) offer discounts to investors who invest certain amounts of money. These discounts – which may be thought of as volume discounts ? are available on shares from all the funds within a fund complex that are sold with sales charges and do not apply to “no load” funds, which are sold without sales charges. The amount of the discount varies, depending upon the amount of the investment. The investment amounts at which investors qualify for the discounts are called breakpoints. The higher the level of your investment, the more likely you are to qualify for a breakpoint discount.
How are breakpoints determined?
Many mutual funds or families of funds offer breakpoints, and the eligibility requirements to qualify for a breakpoint discount vary from one fund to another. Because fund companies have their own formulas for determining breakpoints, it is important that you ask your financial professional, or the fund itself, about the investment levels at which breakpoints are offered and which mutual fund holdings of yourself or your family members are included when determining eligibility for breakpoints.
How can I determine if my mutual fund provides breakpoints?
Mutual funds that offer breakpoints must include in their prospectuses a schedule that shows the dollar amounts at which the discounts are offered. Typically breakpoints will be found in the prospectus’ discussion of sales charges. You can request a prospectus from the fund company, or from the broker or financial professional through whom the fund is offered for sale or find a copy on the fund’s website.
| Sample Breakpoint Schedule | |
|---|---|
| Your Investment | Sales Charge |
| Less than $25,000 | 5.00 percent |
| $25,000 or more but less than $50,000 | 4.25 percent |
| $50,000 or more but less than $100,000 | 3.75 percent |
| $100,000 or more but less than $250,000 | 3.25 percent |
| $250,000 or more but less than $500,000 | 2.75 percent |
| $500,000 or more but less than $1 million | 2.00 percent |
| $1 million or more | none |
What is a right of accumulation (ROA)?
A right of accumulation is a privilege provided to shareholders by a mutual fund. It allows individual investors or groups of related investors to combine their account holdings within the same fund family to qualify for a breakpoint discount. Different mutual fund organizations may have different rules regarding what types of accounts may be linked for purposes of qualifying for a right of accumulation.
Here’s how an ROA works:
You have $52,000 invested in the ABC Growth Fund, which is sold with a 3.75 percent front-end sales load. You plan to invest an additional $50,000 in the ABC International Fund. Using the ROA privilege, your new $50,000 investment can be combined with your existing ABC Growth Fund account balance to total $102,000. As a result, you will pay the lower sales charge of 3.25 percent applicable to purchases of at least $100,000 on your new $52,000 investment.
What is a letter of intent (LOI)?
A letter of intent allows investors to qualify for a breakpoint discount without immediately investing the dollar amount at which the discount is offered. For example, by signing a letter of intent, an individual investor who intends to invest an amount necessary to trigger a load fund’s breakpoint (such as $50,000) within a designated period (such as 13 months) would be allowed to receive the breakpoint discount on the sales charge as if the investment had been made in a single lump sum.
Here’s how an LOI works:
The XYZ Family equity funds are sold with a 5.00 percent front-end sales load. That sales charge declines to 3.25 percent for purchases in excess of $100,000. You open an account in the XYZ Growth Fund with a $10,000 investment and sign a letter of intent indicating that you intend to purchase a total of $100,000 worth of shares in one or more of the XYZ Family equity funds within the next 13 months. Consequently, you will receive a breakpoint discount on your purchase and pay a sales charge of 3.25 percent.
In the event the investors fail to fulfill their commitment under the LOI, they will be liable to pay the sale load applicable to the actual amount invested.
What is being done to ensure that I receive proper breakpoints?
Broker-dealers have a regulatory obligation to ensure that investors are charged the appropriate sales charge when buying mutual funds. A broker-dealer’s failure to provide breakpoints to an eligible investor may subject the broker-dealer to regulatory penalties including fines, censures, and suspensions. Broker-dealers are also prohibited from selling a mutual fund to an investor in a dollar amount just below a breakpoint without clearly informing the investor of the next available breakpoint (i.e., if the investor invested more money it would reduce the sales charge).
How can I be sure I got the right breakpoint?
It is important for you and your financial professional to work together to make sure any breakpoints provided by your fund are applied to your purchase. This teamwork is particularly important where you have a right of accumulation that allows you to combine the balances in your accounts or your family members’ accounts in the same fund or fund family that might be held through the fund, another broker-dealer, or another financial professional. In that case, your broker must notify the fund company about which of your accounts and your family members’ accounts should be linked together to compute your sales charge. As long as your financial professional submits the correct information about your accounts to the fund, the correct sales load for that transaction should be applied to the purchase. After completing your transaction, be sure to check your account statement to see if the correct breakpoint has been applied. If it hasn’t, contact the financial professional who handled your sale. Usually, your account will be corrected promptly or you will receive a complete explanation. If not, you may contact the firm’s compliance department. If you still are not satisfied with the response, you can file a complaint with the regulators of the broker-dealer at the SEC or FINRA complaint centers.
For More Information
- Investment Company Institute Investor Education
- U.S. Securities and Exchange Commission
- Financial Industry Regulatory Authority (FINRA)
- Securities Industry and Financial Markets Association (SIFMA)
May 2007
