What Is a Breakpoint?
A breakpoint is the dollar amount for the purchase of a load mutual fund's shares that qualifies the investor for a reduced sales charge. Breakpoints offer investors a discount for making larger investments. The purchase may either be made in a lump sum or by staggering payments within a specified period of time. The latter form of investment purchase in a fund must be documented by a letter of intent (LOI).
- A breakpoint is the dollar amount for the purchase of a load mutual fund's shares that qualifies the investor for a reduced sales charge.
- Breakpoints allow for reduced fees for large purchases, which often benefit institutional investors.
- Breakpoints are determined by the mutual fund and integrated within the fund distribution process.
- Rights of accumulation (ROA) grant existing holders of mutual fund shares the potential for reduced loads (commissions) when purchasing more fund shares to reach breakpoints.
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.
Breakpoint discounts often begin at $25,000.
|Sample Breakpoint Schedule Class A Shares (Front-end Sales Load)|
|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%|
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.
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.
Letter of Intent (LOI)
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.
Rights of Accumulation (ROA)
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.