Breakpoint (Mutual Funds)

A breakpoint is a purchase amount at which the front-end sales charge on a mutual fund drops to a lower rate. Funds that sell Class A shares with a front-end load publish a table of these thresholds, for example $50,000, $100,000 and $250,000, and every investor whose purchase reaches a threshold is entitled to the lower charge. At the top of the table, often at $1 million, the load usually falls to zero.

Breakpoints are a volume discount on mutual fund loads. They work together with two other features that help investors reach a threshold: rights of accumulation (ROA), which count shares already owned, and a letter of intent, which counts purchases promised over the coming months. In the United States the breakpoint schedule must be set out in each fund's prospectus, and the broker-dealers selling the fund are supervised by the Financial Industry Regulatory Authority (FINRA).

Breakpoints are the fund world's version of a bulk discount. A shop might charge full price for one bottle of olive oil, a bit less each for a case of six, and less again for a pallet. The more you buy, the lower the rate on the whole order, not just on the extra bottles.

The same logic applies here. If your purchase lands in a higher band, the lower sales charge applies to the entire purchase. Many shops also let you count earlier orders or promise future ones to qualify for the bulk price, and funds offer both of those as well.

Each fund family sets its own schedule. The table below is an illustration of a common pattern for an equity fund, not the terms of any particular fund:

The sales charge on a purchase is:

Here $r_b$ is the rate for the band the purchase falls into. A $45,000 purchase pays $0.0575 \times 45{,}000 = 2{,}587.50$ dollars, while a $50,000 purchase pays $0.045 \times 50{,}000 = 2{,}250$ dollars. Investing $5,000 more costs about $337 less in sales charges. Purchases at or above $1 million that pay no front-end load are often subject to a 1% contingent deferred sales charge (CDSC) if sold within 12 to 18 months. Bond funds usually start from a lower top rate than equity funds.

Funds let investors combine several amounts to reach a breakpoint. The details differ, so the prospectus and the statement of additional information (SAI) are the authority, but the usual features are:

• Several funds in one family. Purchases across different funds managed by the same company can usually be added together.
• Related accounts. Holdings of a spouse, minor children and sometimes other household members can count, along with accounts such as an individual retirement account (IRA), education savings accounts and accounts at different firms.
• Existing holdings. Through rights of accumulation, the value of shares already owned is added to a new purchase.
• Future purchases. A letter of intent lets an investor buy at a lower rate now by committing to invest a larger total, usually within 13 months.

The investor generally has to tell the broker or the fund's transfer agent about other accounts, because no single firm may see all of them. The discount only applies to the front-end load, so it matters for Class A shares and not for other share classes.

FINRA Rule 2342 ("Breakpoint" Sales), carried over from the old NASD IM-2830-1, forbids selling fund shares in amounts just below a breakpoint in order to earn the higher commission. FINRA Rule 2341, which caps sales charges at 8.5% of the public offering price (POP), also lowers that cap for funds that do not offer quantity discounts or rights of accumulation.

Breakpoints became a major enforcement issue in the early 2000s. In December 2002 the NASD issued a special notice reminding firms to apply the discounts, and a joint examination by the NASD, the Securities and Exchange Commission (SEC) and the New York Stock Exchange found that many eligible investors had not received them. Firms were required to review past sales and refund overcharges, an industry task force issued recommendations, and in June 2004 the SEC amended Form N-1A so that every fund must describe its breakpoint arrangements and eligibility rules in the prospectus.

Breakpoints mainly benefit investors who put larger sums into a single fund family, such as people consolidating savings or rolling over a retirement plan. Someone investing small amounts through dollar cost averaging can still reach them through rights of accumulation. Because the discount is calculated on the offering price, it lowers the price paid per share relative to net asset value (NAV) and leaves more money invested from the start.

Breakpoints matter less than they once did, because many investors now use no-load funds, exchange-traded funds (ETFs) or fee-based accounts in which an investment adviser charges a separate fee and loads are waived. Where loaded funds are still sold, US investors can check the schedule in the fund's prospectus or fund fact sheet.

• FINRA Rule 2342: "Breakpoint" Sales
• FINRA: Breakpoints