Sales “breakpoints” give large investors a discount on fees by minimizing the cost of front-end charges on A-share mutual funds. These programs serve the interests of both the investor and the mutual fund company by encouraging the conglomeration of assets with a single provider and helping minimize investor fees, which increases overall return. For example, if you only have $1,000 to invest, you might pay a 5.75% sales charge to invest in A-share mutual funds, whereas if you had $100,000 you would only pay 3.25%. Moreover, if you had $1 million to invest, you wouldn’t pay any sales charge at all. This difference in sales charges can amount to serious savings, which means more money invested and more compound interest over time. Read on to find out how to take advantage of breakpoints.
How to Qualify for Breakpoints
Mutual fund companies offer many creative ways to allow investors access to sales breakpoints, but generally speaking, investors need relatively large sums of money to benefit from these programs. You may be entitled to a sales breakpoint in any of the following circumstances. (See also: The Lowdown on No-Load Mutual Funds.)
- Large Nominal Dollar Amounts: If you have at least $100,000 to invest and don’t mind placing those assets within a single mutual fund family, this is the first and easiest way to get a break on sales charges. The more you invest, the lower the sales charge. When you exceed $1 million in investable assets, the front-end sales charge might be eliminated.
- Aggregating Accounts and Concurrent Purchases: Although these methods of using breakpoints also depend on having large sums of money, the assets can be spread across multiple accounts as long as they have a beneficial ownership interest among them. For example, several family members may each have, or plan to make, investments that individually would not qualify for a sales breakpoint. However, through aggregating accounts and concurrent purchases, the mutual fund company will consider the immediate family members’ collective holdings and purchases as a single account and assign the appropriate breakpoint.
- Rights of Accumulation and Letter of Intent: This method does not require large sums be invested all at once. Instead, the methods allow you to make purchases in small amounts over time and still realize breakpoints along the way. Rights of accumulation provides the benefit of breakpoints on new purchases of any amount after you realize certain levels of total invested assets. A letter of intent, which you sign to express your intent to invest, allows you to realize the next breakpoint within a period of time that the fund specifies. This is useful for small, regular investments as part of a long-term plan.
- Reinvestment: Once you pay a sales charge, you won’t have to pay again as long as you keep your money within the same fund family. This allows investors to shift among varying strategies over time without continuously incurring sales charges. For example, if you pay a 5% sales charge to get into a large-cap mutual fund but then choose to shift your assets into a small-cap mutual fund, you can do this without paying another 5% load; if you shift assets to another fund family, you will be subject to another sales charge.
Sales breakpoints can have profound benefits for your portfolio. The lower the sales charge you pay to invest in a mutual fund, the more money you invest, and the more money you will earn over time through the benefits of compounding returns. (See also: Understanding the Time Value of Money and Overcoming Compounding’s Dark Side.)
Tricks of the Trade
Be aware of little tricks that brokers play to deny you rightful access to breakpoints. Brokers are paid on the sales charge you pay, creating a strong economic motivation to keep your sales charge as high as possible. Here are a few simple tricks to reduce your fees:
- If you have enough money to take advantage of breakpoints, don’t spread your money across multiple mutual fund families because in such small amounts, you won’t qualify for breakpoints. Yes, something can be said for the intellectual diversification of using multiple fund families, but asset class diversification is most important and virtually any mutual fund family can provide this service. (See also: Diversification: It’s All About (Asset) Class.)
- Don’t split your investments among various types of share classes. This means don’t put some of your money in Class A shares, some in Class B shares and some in Class C shares, all in small enough amounts to not qualify for a breakpoint. Some mutual fund families might accommodate this practice and still allow breakpoints, but don’t assume this is the case. (See also: The ABCs of Mutual Fund Classes.)
- Don’t first invest in Class A shares, sell them, and then reinvest in Class B shares. The likely rationale a broker would use in this regard is to say the A-share fund isn’t performing well enough and that you can avoid another front-end sales charge by shifting into B-shares. The result of this scenario is that the broker is paid twice. If you fall prey to this practice, you’ll end up paying both a front-end sales charge and a deferred sales charge.
Government regulations are strongly slanted in favor of the investor. This is because it is utterly essential for investors to believe they are being protected from unscrupulous business tactics in order to encourage healthy, functioning financial markets. The best way to keep your broker honest is to always make sure any recommendation is in writing. Never act on any verbal-only recommendation. If your broker won’t put a recommendation in writing, then that broker is either too unsophisticated to be good or too afraid to leave a paper trail. Either way, it’s a bad sign.
If you believe you have been wronged by a broker and denied your rightful access to a sales breakpoint, do not panic. Generally, an investment firm that cheats an investor out of money is rare because of potential regulatory sanction. However, that does not stop individual employees from trying. In these instances, your best course of action is to put your complaint in writing and send it to your broker’s supervisor. When a registered brokerage house receives a written complaint, the brokerage is obligated by law to act upon the complaint and keep a formal record of its response. If the brokerage firm does not appear to take action and your concerns are unheeded, then report the problem directly to the Securities and Exchange Commission or the Financial Industry Regulatory Authority. However, after you file a legitimate written complaint with a brokerage house, the situation is likely to be resolved. (See also: Choosing a Compatible Broker.)
The Bottom Line
To determine if paying a front-end sales charge makes sense, analyze the annual cost savings in expense ratios for A-shares relative to other share classes. Generally speaking, A-shares have lower expense ratios than other share classes, but it needs to be a big enough difference to justify the cost of the sales charge over your investment time horizon. This is important because the fees you pay are the only guaranteed impediment to investment return—keeping them as low as possible should be a priority. (See also: Mutual Funds: The Costs.)