Ensure That You Receive Your Mutual Fund "Breakpoint" Discounts

nvestors buying mutual funds need to know that special discounts, or "breakpoints", may be available to them. It has become apparent that some investors are not receiving these discounts.

The problem has resulted in investors "potentially overpaying substantial amounts of money", according to one securities regulator, Mary Shapiro, vice-chairman of the National Association of Securities Dealers (NASD). The NASD is joined by the Securities and Exchange Commission in alerting brokerage firms as well as investors of this important issue.

Let's examine mutual fund breakpoints. First, what are they? Mutual fund companies charging front-end sales loads (for so-called "A Shares") may choose to charge lower sales loads for larger investments in their mutual funds. In fact, it is common for a mutual fund company to set its breakpoints for sales charge discounts at $50,000, $100,000, $250,000, $500,000 and $1 million. The sales load may be reduced, for example, from 5.75% to 3% or less, which is a significant discount.

Importantly, brokerage firms must apply these mutual fund discounts to their customers. In a recent special notice to its members, the NASD advised:

"NASD and SEC staff consider it essential that mutual fund executions are effected on the terms most advantageous to the customer. Determining the correct sales charge is an obligation held by members [brokerage firms] and requires a high degree of vigilance to ensure that customers receive the full benefit of available price discounts to which they are entitled."

In other words, brokerage firms bear the burden of knowing and implementing the discounts to provide their customers the best rates. Likewise, firms cannot structure a purchase so that it falls below a breakpoint minimum, for example, by taking a $50,000 purchase and executing it in two $25,000 purchases.

Knowing what breakpoints are, let's address how investors can qualify for them. Of course, investors can qualify for a breakpoint simply by making one purchase for the qualifying purchase amount (say $50,000). That may or may not be financially feasible. However, there are two alternatives to the lump sum purchase: the Letter of Intent (LOI) and the Right of Accumulation (ROA). An important fact to remember is that these discount vehicles apply not only to the purchases of the same mutual fund but also to purchases of different mutual funds so long as the purchases are made within the same mutual fund family (such as Fidelity or Janus).

The Letter of Intent or LOI is nothing more than a statement that the investor signs which indicates that he or she intends to purchase a certain amount of mutual fund shares over a stated period of time. For instance, an investor can state that he intends to make ten $5,000 purchases over the next twelve months, totaling $50,000. In that case, the mutual fund company, and the brokerage firm, would impose the reduced sales load across the entire purchase. Likewise, the Right of Accumulation or ROA is the discount or breakpoint received in a current mutual fund purchase based upon the cumulative value of previous purchases.

The final question to address is how do investors learn of these discounts? Certainly, if an investor is working with a full service brokerage firm, she can insist that her financial adviser inquire and advise her of the applicable breakpoints. Investors also can access the breakpoint information from the mutual fund company's website. Examine the prospectus for the mutual fund for the breakpoint information.

Once an investor knows the applicable breakpoints, she should contemplate making a sufficiently large purchase or executing a LOI (Letter of Intent). In the event that the investor already has purchased shares of the same mutual fund, or has purchased shares in a different mutual fund within the same fund family, the investor should contemplate claiming a ROA or Right of Accumulation.

The NASD has announced that it has found breakpoint violations at brokerage firms "big, medium and small", and that it intends to bring disciplinary actions against those firms. Meanwhile, investors need to examine their mutual fund purchase confirmations to determine whether their sales charges are accurate and discounted as much as possible. Should an investor discover that he has not received a discount, he has a right to demand that discount from the brokerage firm even after the purchase has been made.

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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He is a past co-chair of the Chicago Bar Association's Securities Law Committee, a past chair of its Financial and Investment Services Committee, a registered investment advisor and a licensed securities principal of the National Association of Securities Dealers (NASD). He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat & Filipowski and can be reached at 312-621-4400.