What is a Cumulative Discount Privilege
Cumulative discount privilege is a way for mutual fund investors to qualify for lower fees for a particular fund based on the total amount invested in several funds offered by the same mutual fund company, typically from the same fund family.
Generally, fees for investing in a mutual fund decrease based on total amount invested. Some funds have required investment minimums in order to receive lower fees. The cumulative discount privilege gives investors this discount based on a minimum that applies to all related funds, rather than a particular fund.
Sometimes investors also qualify for the cumulative discount privilege by agreeing to make several investments in a fund or fund family over a defined period.
BREAKING DOWN Cumulative Discount Privilege
Cumulative Discount Privileges are somewhat common, and sometimes also apply to hedge funds and other investments offered by registered advisers.
Say Bird Mutual Fund Company charges 0.75% a year for its Robin Fund, based on a minimum of $20,000 invested. However, it charges 0.50% a year for a minimum of $100,000 invested. However, it also offers a Woodpecker fund and a Blue Jay Fund with the same minimums. However, Bird Mutual offers a $150,000 cumulative discount privilege. Investors qualify for 0.50% fees in all three funds, provided they invest $150,000 collectively in the three funds.
If Bird Mutual extends the lower 0.50 a year fee to customers willing to invest $110,000 upfront, provided they agree to invest $10,000 a quarter for each of the next four quarters, this also represents the cumulative discount privilege.
Pros and Cons of Cumulative Discount Privilege
Provided the cumulative discount privilege is clearly stated and applied evenly for all customers, then many investors consider it fair, although some smaller customer sometimes balk at paying higher fees based on the amount in their respective accounts.
However, the cumulative discount privilege reflects a reduction in marketing cost for the mutual fund company. It simply costs a mutual fund company more to service two $75,000 accounts than it does one $150,000 account.
What isn’t fair is when the rules regarding cumulative discount privilege are not clear. Some companies in the mutual fund industry have straightforward fees, while others tend to obscure the rules with complex language.
Mutual funds always spell out all related fund fees in the prospectus. Each fund needs to update the prospectus once a year, so it’s always up-to-date. It’s not enjoyable reading, but it’s the best place to go to fully understand a fund’s fees breakdown.