Mutual Fund Breakpoints

If you are planning to invest in mutual funds, you need to learn about breakpoints.

Breakpoints are specific investment amount levels. Breakpoints are set by mutual funds. Breakpoints offer mutual fund investors the opportunity to get a discount on their sales load.

What is a sales load?

Whenever you buy shares to a mutual fund, you may have to pay a sales load. Most mutual funds have sales loads.

The sales load is payable to the broker. It is a fixed percentage of the value of your investment, and it is added on top of your actual purchase price. The sales load represents the commission a broker gets for distributing shares of a certain mutual fund.

There are two types of sales load. The front-end type is charged at the time of purchase. The back-end type is charged when the investor redeems his mutual fund shares.

Mutual funds sales load rates vary by mutual fund. There is no maximum sales load that a mutual fund can charge as per SEC rules. However, FINRA does limit sales load to 8.5%. Most mutual funds have a sales load below this FINRA ceiling.

What has breakpoints got to do with sales load?

Breakpoints represent a diminishing sales load rate. Let's say, for instance, that a mutual fund charges a 5% sales load for mutual fund purchases. However, it has breakpoints of $30,000, $60,000 and $90,000. If your investment matches or goes over these breakpoint amounts, you get a discounted sales load rate.

Going back to our hypothetical mutual fund, the investments from $30,000 to $59,999.99 may come with only a 4% sales load instead of the regular 5% sales load. Investments from $60,000 to $89,999.99 on the other hand may come with a sales load of only 3%. Finally, investments of at least $90,000 may come with an even smaller sales load of 2%.

Mutual funds charge a sales load to compensate brokers that distribute these shares. On the other hand, they offer breakpoints to encourage investor clients to purchase more shares or contribute more money into their funds.

Are you eligible for a breakpoint discount?

Mutual funds have different rules for determining investor eligibility for breakpoint discounts.

• Some compute breakpoint eligibility cumulatively for each individual investor (e.g. your total investments). For such mutual funds, your total personal investments are added up. As your total investments accumulate, your sales load charges also get progressively lower.
• Some compute breakpoint eligibility cumulatively for individual investors in a household. This offers you the chance to reach breakpoints (and enjoy breakpoint discounts) much sooner.
• Some permit investors to aggregate investments made using different accounts (e.g. different brokerage accounts, a retirement account, a college savings account).
• Some funds allow investors to claim breakpoint discounts for investments made in different funds, as long as such investments are combined in a single fund family.
• Some funds also allow investors to aggregate their investments in a mutual fund, even if these investments are of different classes.
• Some funds compute breakpoint eligibility on a per-purchase basis. Investors will find this the least rewarding breakpoint computation scheme. A breakpoint discount is awarded on a purchase only if the purchase amount matches or goes over the breakpoint. Otherwise, regular rates would apply. It wouldn't matter then if the investor (or members of his household) has already accumulated a total investment valued well above the highest breakpoint level.

If you think you are eligible for a breakpoint discount but were not offered or given one, you should discuss the matter with your broker. If you acquired your shares directly from the mutual fund, you should speak with your fund manager or his representative.

If you're not satisfied with the explanation you're given, write your broker or your fund manager about your problem. Don't forget to request a response in writing. If you remain unsatisfied with the results of your efforts (either you do not receive a response or you're not given a refund), you can file a complaint with the SEC.

Things You Need to Know about Breakpoints and Breakpoint Discounts

• Breakpoints are optional. The SEC does not require mutual funds to offer them. The decision to offer a breakpoint belongs entirely to mutual funds.
• The breakpoint amounts are variable. Mutual funds decide their own breakpoints.
• Sometimes, a fund may give you a breakpoint discount on a purchase worth less than the published breakpoint level. In exchange for this discount, you may have to promise (in writing) that you will buy more shares within a preset period of time or stay with the fund for a period longer than the required maturation period. If you get a breakpoint discount under special terms, you'd have to fulfill your end of the deal or you may be assessed additional fees (the discounted amount) plus penalties.
• If buying mutual fund shares through a broker, you should be careful to check if the fund offers breakpoints. Mutual funds that offer breakpoints need to disclose such breakpoints in their literature. If breakpoints do exist and if your broker or firm is a member of FINRA, your broker cannot limit your purchase so that it falls to an amount just below the breakpoint. In other words, it should be up to you to decide whether or not you'll take advantage of a breakpoint discount.

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