Some mutual funds that charge front-end sales loads will charge lower sales loads for larger investments. For example, a fund might charge a 5.75% front-end sales load for investments up to $50,000, but reduce that charge to a 4.50% load for investments between $50,000 and $99,999, and further reduce or eliminate the load for larger investments. The investment levels required to obtain a reduced sales load are commonly referred to as breakpoints.
Funds are not required to offer breakpoint discounts and those that do may set them at their discretion. But, if mutual funds offer breakpoints, mutual funds must disclose them and brokers must apply them. In addition, a brokerage firm is not allowed to sell shares of a mutual fund in an amount that is just below the mutual fund’s breakpoint simply to earn a higher commission.
Funds may determine breakpoint eligibility in a variety of ways. For example, some funds offer a breakpoint discount when the dollar amount of purchased shares reaches or surpasses a pre-determined threshold, or a “rights of accumulation” breakpoint. Some funds determine eligibility for this type of discount by looking at total investments in the fund by household, which may include multiple accounts, such as retirement savings accounts and college savings accounts. Other funds look only at the total amount that an individual has invested personally. Fund investors may also be entitled to combine a share purchase with existing holdings to obtain the discount.
As another example, some funds permit investors to obtain a breakpoint discount if the investors agree to make additional purchases in the future. In such cases, the investor signs a letter of intent to make additional purchases in the future. Failure to honor that pledge may result in retroactive fees that rescind the discount, and a fund might reserve the right to redeem shares from an investor’s account to recoup that amount.
Since each fund company establishes its own formula for how it will calculate whether an investor is entitled to receive a breakpoint discount, it is important for investors to seek out breakpoint information from their financial advisers or the mutual fund itself. An investor will need to ask how a particular mutual fund establishes eligibility for breakpoint discounts, as well as what the mutual fund’s breakpoint amounts are. Some of this information is also included in the fee table section of the mutual fund’s prospectus or summary prospectus. In the fee table or other parts of the prospectus, breakpoints may be referred to as sales charge discounts.
