Some mutual funds that charge front-end sales loads will charge lower sales loads for larger investments. For example, a fund might charge a 5% front-end sales load for investments up to $25,000, but reduce that to a 4% load for investments between $25,000 and $50,000 and 3% for investments exceeding $50,000. The investment levels required to obtain a reduced sales load are commonly referred to as “breakpoints.”
Funds are not required to offer breakpoint discounts and those that do may set them at their discretion. But, if mutual funds offer breakpoints, mutual funds must disclose them and brokers must apply them. In addition, a brokerage firm is not allowed to sell shares of a mutual fund in an amount that is just below the mutual fund’s breakpoint simply to earn a higher commission.
Each fund company establishes its own formula for how it will calculate whether an investor is entitled to receive a breakpoint discount. For that reason, it is important for investors to seek out breakpoint information from their financial advisers or the mutual fund itself. An investor will need to ask how a particular mutual fund establishes eligibility for breakpoint discounts, as well as what the mutual fund’s breakpoint amounts are. Some of this information is also included in the “Fee Table” section of the mutual fund’s prospectus or summary prospectus. In the fee table, breakpoints are referred to as sales charge discounts.
Some funds determine eligibility for a breakpoint discount by looking at total investments in the fund by household, which may include multiple accounts, such as retirement savings accounts and college savings accounts. Others look only at the total amount that an individual has invested personally. Fund investors may also be entitled to combine prior fund purchase amounts to obtain a breakpoint discount on additional investments in the fund. Some funds permit investors to obtain a breakpoint discount if the investors agree to make additional purchases in the future. In such cases, the investor signs a “letter of intent” to make additional purchases in the future, and the failure to honor that pledge may result in retroactive fees that rescind the discount.