Breakpoint Sale

A breakpoint sale is the sale of a mutual fund at a set dollar amount that allows the fundholder to move into a lower sales charge bracket. If, at the time of investment, an investor is unable to provide the funds needed to qualify for the lower fee, he can sign a letter of intent promising to reach the total amount, or breakpoint, in a set time period.

Breakpoint sales provide fee discounts to investors based on investment breakpoint levels determined by the fund company. Fund companies are responsible for structuring sales loads and breakpoint schedules. These fees and breakpoints are detailed in a fund’s prospectus and agreed upon by intermediaries.

Open-end mutual funds transacted through a full-service broker are required to pay sales loads to intermediaries for the service of identifying, recommending and transacting the fund. Sales loads on mutual funds can be front-end, back-end or level. Breakpoint schedules are levels set by the mutual fund that allow an investor to receive a sales load discount. Discounts from breakpoints are typically applied to funds with front-end sales load, but they could be applicable to all shares of a fund.

Breakpoint discounts often begin at $25,000, with discounts increasing incrementally to a maximum level. Beyond the mutual fund’s maximum breakpoint level, investors will no longer incur sales load charges. Financial advisors are required to provide full disclosure of breakpoint schedules and ensure that investors are aware when a minimal additional investment could qualify them for a higher discount.

Below is a sample breakpoint schedule provided by the Financial Industry Regulatory Authority:

Investment and Sales Charge

Less than $25,000: 5.00%

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: 2.00%

$1 million or more: No sales charge

Following the above breakpoint schedule, an investor planning to invest an initial $40,000 in a front-end load fund would receive a discount and face a charge of 4.25%, or $1,700. If the investor is properly advised she will be told that adding $10,000 for a total investment of $50,000 would qualify the sale for a lower sales charge of 3.75%.

Most mutual funds will include accumulation privileges in their sales load and breakpoint schedules. Accumulation privileges allow an investor’s sales charge from a breakpoint schedule to be based on their total investment in the fund. For example if the investor from above invests another $15,000 six months later, she would qualify for the same sales charge of 3.75% on the $15,000 transaction.

Mutual fund companies with sales loads and breakpoint schedules typically also include provisions for a letter of intent. This documentation allows the investor to pledge a specified investment in the fund and receive the sales load fee for their comprehensive investment.