Key Takeaways
- Breakpoints are dollar amounts for mutual fund purchases that reduce sales charges for investors.
- Investors can use letters of intent to reach breakpoints over a set period, saving on initial and future purchases.
- Rights of accumulation allow investors to combine past and future investments to qualify for reduced sales charges.
- Breakpoint levels and eligibility must be clearly disclosed in mutual fund prospectuses to ensure transparency and informed decision-making.
What Is a Breakpoint?
A breakpoint is a specific dollar threshold you need when you’re buying shares of a load mutual fund to qualify for a reduced sales charge. It offers discounts on fees for larger investments. Mutual funds set these breakpoints to encourage larger investments, benefiting both the investor and the fund. Investors can save money by paying lower fees when they invest more in mutual funds at once or over time.
We’ll explain how breakpoints work and how you can benefit from them.
How Do Breakpoints Work?
Breakpoints are set at various levels to offer investors a discount on sales charges when they make larger investments. Breakpoints are determined by the mutual fund and integrated within the fund distribution process. They are typically offered for funds with a front-end sales charge but may be available for other types of sales charges as well.
Mutual funds are required to give a description of breakpoints and eligibility requirements in their prospectuses. By reaching or surpassing a breakpoint, an investor will face a lower sales charge and save money.
Important
Breakpoint discounts often begin at $25,000.
The Financial Industry Regulatory Authority (FINRA) provides the following example of a breakpoint discount schedule:
| Sample Breakpoint Schedule Class A Shares (Front-end Sales Load) | |
|---|---|
| Investment | Sales Charge |
| Less than $25,000 | 5.0% |
| At least $25,000, but less than $50,000 | 4.25% |
| At least $50,000, but less than $100,000 | 3.75% |
| At least $100,000, but less than $250,000 | 3.25% |
| At least $250,000, but less than $500,000 | 2.75% |
| At least $500,000, but less than $1 million | 2.0% |
| $1 million or more | 0.0% |
Examples of Breakpoints in Mutual Funds
Suppose that an investor plans to invest $100,000 in a front-end load mutual fund that carries a standard sales charge of 5.0%, or $5,000, and offers breakpoints. Based on the FINRA’s breakpoint schedule, the investor’s front-end sales charge would be reduced to 3.25% or $3,250. In other words, this investor is able to save $1,750 on the transaction.
Tip
Investors should seek to have a clear understanding of a fund’s breakpoints and all qualifications to ensure they receive the greatest discount for which they are entitled.
Important Factors to Consider with Breakpoints
Mutual funds also allow investors to qualify for breakpoints through letters of intent (LOI) and rights of accumulation (ROA).
How a Letter of Intent (LOI) Affects Breakpoints
A LOI, a formal document signed by the investor outlining their plans for investment in the fund, enables an investor to qualify for breakpoints by committing to an investment schedule over a period of time. Typically, a LOI will allow for future investments to be considered over the next 13 months.
For example, assume a new investor would like to make a $50,000 investment in a fund that follows the sample fee schedule outlined above and has a standard sales charge of 5.0%. If the investor commits to making ten $5,000 payments over the next 13 months through a LOI, then the investor will pay a 3.75% sales charge on each investment.
Understanding Rights of Accumulation (ROA) for Breakpoints
ROA permit investors to pay sales charges based on their total investment in the fund. Assume the new investor from the example above would like to make additional investments after the LOI has expired. Any additional investments would incur a sales charge of 3.75% until the investor reaches the next breakpoint of $100,000.
Basically, ROA grant holders of mutual fund shares the potential for reduced commissions when purchasing more shares. In some cases, ROA may also extend beyond just the targeted share class for investment.