Did My Broker Follow Mutual Fund Breakpoint Rules?

If you purchased a Class A mutual fund, you should know the Financial Industry Regulatory Authority’s (FINRA’s) mutual fund breakpoint rules. These breakpoints can provide investors with significant discounts, and FINRA requires brokers to provide their investors with breakpoint information. Investors who discover that they qualified for a breakpoint discount should file a claim to recover their losses.

Mutual Fund Breakpoint Definition

Class A mutual funds have established “breakpoints,” or amounts at which an investor qualifies for a decreased sales charge. You may also hear breakpoints referred to as “sales charge discounts.” The principle at work is just like any other bulk purchase — the more of a mutual fund you buy, the bigger your discount. It’s up to the fund’s managers to choose what amount qualifies as a breakpoint.

FINRA.org offers the following example of how a mutual fund breakpoint works:

· A purchase of $49,500 in mutual fund shares might come with a sales charge of 5.75%, or $2,846.25.

· Meanwhile, the same mutual fund has a breakpoint of $50,000. If the investor made a $50,000 purchase, they could instead pay a 4.5% sales charge, which equals $2,250, or $596.25 less.

· By increasing the mutual fund purchase by $500, the investor could reduce their sales charges by $596.25, for an overall savings of $96.25.

What Types of Mutual Funds Come with Breakpoints?

Breakpoints offer discounts for investors interested in Class A mutual funds. Class A mutual funds come with front-loaded sales, meaning that they charge their fees upfront. A “load” is a sales charge. Many Class A shares charge a front-end load of approximately 2% to 5%.

Class B mutual funds, on the other hand, are back-end load funds, meaning that they impose an exit fee once the investor redeems their fund. There are also Class C mutual funds, which typically have small back-end loads, as well as no-load mutual funds.

Did My Broker Follow the Mutual Fund Breakpoint Rules?

If a fund offers breakpoint discounts, brokers must disclose that information. But it’s not enough to mention that the breakpoint exists — brokers must also point out if an investor is very close to qualifying for a breakpoint discount. According to FINRA Rule 2342, financial advisors are not allowed to sell mutual funds at just below the breakpoint amount to facilitate a larger sales charge for themselves. For instance, a dishonest broker could earn higher commission by intentionally breaking up a $50,000 mutual fund purchase into a series of smaller purchases, causing the investor to lose out on the discount.

Rights of Accumulation: Pay Less When You Invest More

In addition to breakpoint discounts at the time of purchase, investors can also save money in sales charges if they choose to increase their investment in a particular mutual fund. This might even include purchases made in a different class of mutual fund. Breakpoints can also account for all the funds invested by a single household. For instance, you may have mutual fund investments in both retirement savings accounts and college savings accounts.

Recently, an Acceptance, Waiver, and Consent agreement revealed allegations that a broker had not informed a customer about breakpoint discounts for their mutual fund investments. In this case, FINRA alleged that the broker recommended certain mutual funds without informing the investor that he could save $19,687 in sales charges if he purchased mutual funds in the same mutual fund family as his previous investments. As a result of the allegations, the broker consented to a restitution payment of $19,687 and a FINRA fine of $5,000.

Can’t Pay All at Once? Send a Letter of Intent

Not ready to bump up to the next level for a sales charge discount? You may still be able to take advantage of breakpoint discounts with a letter of intent. A letter of intent (LOI) states how much you plan to invest within a specified timeframe. According to FINRA, many mutual funds companies allow you to include purchases made 90 days before the LOI is signed as well as 13 months after you sign the letter. If the investor fails to make good on their intent to increase their purchase, they will have to pay back the amount of the discount.

How Do I Find Out About My Mutual Fund’s Breakpoint?

Although brokers should provide information about breakpoints upfront, investors should also remember to look for information about breakpoint discounts on their own. You can find them in the “Fee Table” section of the prospectus — the document that describes how the mutual fund works. Investors can also use FINRA’s “Fund Analyzer” to assess how breakpoints might affect their mutual fund purchase.