Taking the Load Off of "Must Have" Fully Loaded Funds
In most instances, the easiest approach is to simply focus on no-load and low-load mutual funds. For every high-performing load fund, there usually is a similar no-load or low-load fund that can be purchased more cheaply.
If you are investing larger amounts of money, however, load funds need not be written off entirely if there is one you find particularly appealing. Many mutual funds that are sold with sales charges (or "loads") offer discounts to investors who invest certain amounts. [These discounts are available only among funds that are sold with sales charges and do not apply to "no-load" funds, which are sold without sales charges.]
The amount of the discount varies, depending upon the amount of the investment. The investment amounts at which investors qualify for the discounts are called breakpoints. The higher the level of your investment, the more likely you are to qualify for a breakpoint discount. Table 1 presents a typical breakpoint schedule.
If you are interested in a fund with a sales charge, here's what you can do to make sure that you take maximum advantage of the available breakpoints.
First, review the fund's breakpoint schedule. The schedule typically is included in the fund's prospectus but may also be found in the fund's Statement of Additional Information. You can also request this information from your broker or financial adviser.
Second, make sure you know what investments you and your family members hold. Be sure to include investments in all your brokerage accounts, retirement accounts, and even your 529 college savings plans. You may be eligible for a breakpoint discount because of mutual fund holdings in a number of brokerage firms or within the same mutual fund family.
|TABLE 1. Sample Breakpoint Schedule|
|Your Investment||Sales Charge (%)|
|Less than $25,000||5.75|
|$25,000 to $49,999||5.50|
|$50,000 to $99,999||4.75|
|$100,000 to $249,999||3.75|
|$250,000 to $499,999||2.50|
|$500,000 to $999,999||2.00|
|$1 million or more||None|
If you have a broker or financial adviser, make sure they know about all of your mutual fund holdings, as well as those of your family members, both inside and outside of retirement accounts. Include purchases made with the assistance of other brokers or directly through the fund company.
Exercise your right of accumulation (ROA). This privilege allows individual investors or groups of related investors to combine their account balances and share purchases within the same fund family to qualify for a breakpoint discount. Different mutual fund organizations may have different rules regarding what types of accounts may be linked for purposes of qualifying for a right of accumulation.
Here's how an ROA works: You have $52,000 invested in the ABC Growth Fund, which is sold with a 5.75% front-end sales load. You plan to invest an additional $50,000 in the ABC International Fund. Using the ROA privilege, your new $50,000 investment can be combined with your existing ABC Growth Fund account balance to total $102,000. As a result, you will pay the lower sales charge of 3.75% applicable to purchases of at least $100,000 on your new $50,000 investment.
Another option is to sign a letter of intent. A letter of intent allows investors to qualify for a breakpoint discount without immediately investing the dollar amount at which the discount is offered. For example, by signing a letter of intent, an individual investor who intends to invest an amount greater than a load fund's breakpoint (such as $50,000) within a designated period (such as 13 months) would be allowed to receive the breakpoint discount on the sales charge as if the investment had been made in a single lump sum.
Here's how a letter of intent works: The XYZ Family equity funds are sold with a 5.75% front-end sales load. That sales charge declines to 3.75% for purchases in excess of $100,000. You open an account in the XYZ Growth Fund with a $10,000 investment and sign a letter of intent indicating that you intend to purchase a total of $100,000 worth of shares in one or more of the XYZ Family equity funds within the next 13 months. Consequently, you will receive a breakpoint discount on your purchase and pay a sales charge of 3.75%.
Check account statements and request corrections, if appropriate. The NASD has reiterated to its members the importance of entering breakpoint data correctly into automated mutual fund order- processing and settlement systems. The NASD also stipulates that a sales professional may not make sales in dollar amounts just below a breakpoint without clearly informing the investor of the next available breakpoint.
It is important for you to work with your financial professional to make sure any breakpoints provided by your fund are applied to your purchase.
This is particularly crucial where you have a right of accumulation that allows you to combine the balances in related accounts in the same fund or fund family. In that case, your broker must notify the fund company about which accounts should be linked together to compute your sales charge. If your broker or adviser submits the correct information about your accounts to the fund, the correct sales load for that transaction should be applied to the purchase.
After completing your transaction, be sure to check your account statement to see if the correct breakpoint has been applied. If it hasn't, contact the financial professional who handled your sale. Usually, your account will be corrected or you will receive a complete explanation. If not, you may contact the firm's compliance department. The SEC and FINRA suggest that if you still are not satisfied with the response, you can file a complaint with either of them at these links: www.sec.gov/complaint.shtml or apps.finra.org/Investor_Information/Complaints/complaintCenter.asp.