A mutual fund company's scale of declining sales charges based on the amount invested is called the fund's breakpoint schedule. Below is an example of a breakpoint schedule for Mutual Fund Company A:
Investment amount Sales charge as a percentage of offering price Less than $25,000 5.75% $25,000 but less than $50,000 5.00% $50,000 but less than $100,000 4.50% $100,000 but less than $250,000 3.50% $250,000 but less than $500,000 2.50% $500,000 but less than $750,000 2.00% $750,000 but less than $1 million 1.50% $1 million or more and certain other investments none
An investor might qualify for these breakpoints in several ways. The investor might add a larger lump sum to the purchase to meet a breakpoint level, thereby reducing the sales charge by as much as 1% or more, for instance. (Note: For the purposes of breakpoint qualification, married couples, parents and their minor children, and corporations count as single investors!)
- Letters of Intent (LOI): You will often come across clients who may not have enough money at present to qualify for a fund's breakpoint schedule, but who will have access to more money to invest in the future. In order to decrease the sales charge on the present fund purchase, the investor can agree to invest the additional funds necessary to reach the breakpoint within 13 months by signing a letter of intent.
The customer must complete the additional investment to qualify for the reduced sales charge. The fund family will hold the extra shares in escrow, and the investor must deposit the additional money to complete the LOI. If the customer has not completed the investment amount within the 13 months, he or she can make up the difference in sales charges by either redeeming escrowed shares or paying by check. Appreciation and reinvested dividends do not count toward the LOI.
- Rights of Accumulation (ROA): Rights of accumulation allow the investor to qualify for a reduced sales charge on a new purchase by taking into consideration the value of the investor's account including the capital appreciation to qualify for breakpoints without any time limits. The mutual fund company will usually allow the investor to take into account the current value of existing holdings in any class of shares,
Exam Tips and Tricks
You will need to know the defining characteristics of and differences between letters of intent and rights of accumulation. Both will be indispensable to you in your role as investment representative
Exchanges within Fund Families
Exchange privileges within a mutual fund family allow the investor to convert holdings in one fund for an equal investment amount in another fund within the same family without incurring a sales charge. Not all fund families allow this privilege, and some limit exchanges according to the total fund value of the shareholder's current holdings or the number of exchanges per year. This information is contained in the mutual fund prospectus.
When an investor decides to exchange funds within the same share class, there are no sales charges for the service. However, exchanges have the same tax consequences as ordinary sales and purchases. That is, any gains will be taxable and any losses may be used against other gains.
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