Save on Mutual Fund Fees
Pay lower fees to mutual funds by using breakpoints.
Andrew Horowitz
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Save on Mutual Fund Fees
Today on “Money Girl”, a few quick and dirty tips on how to reduce the loads you pay on mutual funds using breakpoints.
Let me ask you something..Are you tired of paying high sales charges every time you invest in mutual funds? Better yet, have you ever wondered why some people seem to be paying lower fees than you?
If so, then you may be interested in a little thing called breakpoints. And, if you have a good deal of money to invest you should listen closely because this episode may just save you thousands of dollars.
What Is a Load?
Breakpoints are discounts on sales charges that you can get when investing large sums into a what’s called a load mutual fund. A load is the sales charge some mutual funds charge you for investing in their fund. Now, it is important to note that there are several ways to invest in mutual funds and just as many fee structures. They range from front-end load, where you pay the fee up front, to back-end load, where, depending on how long you hold the fund, you will pay a fee when you take your money out, and even true no-loads, where you pay no sales charges at all. While I recommend only no-load funds to my clients, if you work with a full-service stockbroker, you will probably be paying some form of commission when you invest. So, if that is you…listen up!
Breakpoints Reduce the Load
A group of funds distributed by one company is referred to as a fund family. Breakpoints exist to encourage investors to combine all their assets into a single fund family in exchange for a reduction of fees. And, if enough money is invested (but that is typically over one million dollars) the sales charges are usually waived entirely.
One note: Sales charge breakpoints only apply to funds with a front-end load, sometimes called “A” shares. Remember, since you are charged a fee or a load at the time of investment, it is considered FRONT-END. Also, you can only qualify for breakpoints with investments in the SAME fund family.
Make a Large Investment
The good news is that there are a few ways to qualify for a breakpoint.
First of all, the most common: the investment of a large sum of money all at once. For most funds the breakpoint begins at $25,000. The more you invest the more of a discount you get. But there are other tricks too besides just having a wad of cash.
Combine Family Accounts
Another way to obtain a breakpoint is by combining accounts or making concurrent purchases. This is often done with immediate family members who all want to purchase investments at the same time or have similar holdings within the same mutual fund family. Fund companies can look at all the accounts as one investment amount and give everyone a breakpoint. Of course, each account is still separate, but you can use your combined buying power to qualify for the savings.
Add it up Over Time
There is also the Rights of Accumulation also known as ROA. An ROA allows you to receive breakpoints on smaller, ongoing investments after the total surpasses the breakpoint level. For example, suppose someone already has $50,000 invested in a fund family but they plan on continuing to invest $5,000 at a time every few months. Investing only $5,000, this person typically wouldn’t qualify for a breakpoint since as we have seen it will usually begin at $25,000. But since they already have so much invested, they are allowed to still qualify for the total level of their overall investment.
Make Your Intent Known
Similar to this, there is the Letter of Intent that creates a contract of sorts. If you plan on investing a certain amount of money over a specified time you can write a letter of intent to qualify for breakpoints. A letter of intent expresses your intent to invest some amount of money over some amount of time. This has to be initiated by you and the letter submitted to the company before you invest, but as long as the total is large enough and you do it within 13 months, you will qualify you for a lower fee on each investment, even though the initial monies are not at the breakpoint level.
So for example, if you intend to invest $40,000 over the next six months and want to qualify for a lower fees, you can do this by making an initial deposit that is greater than the breakpoint level or qualify several small deposits with a letter of intent.
Move Around Within a Fund Family
Lastly, even if you want to move your money to a different fund, you can continue to qualify for breakpoints if you reinvest within the same mutual fund family. For example, if you withdraw your investment from one fund and wanted to change those assets to another within the fund family, you could do so without paying another sales charge. You will carryover your investment and if you continue to invest, you can still qualify by using one of the breakpoint strategies.
Make the Most of Breakpoints
Some tips…don’t spread your money around into several different mutual fund families if there are good funds that meet your objectives with the fund family you are already investing. It probably won’t be worth it in the long run because of the additional expense you will pay upfront. Also, resist splitting your assets into different types of share classes. If you must pay a load, pick either Class A, B, or C and look at the prospectus to find out which will be more cost effective. Usually, the more you invest, the better the savings by using front-end loads with breakpoints.
Research the Fee Structure
When choosing a mutual fund family, you can request to see their breakpoint schedule in advance to make sure they do offer breakpoints and that they are at competitive rates. If you ever feel like you have been ripped off, didn’t receive the breakpoints you should have, or were were pushed into specific load option that was not in your best interest, you can look to file a complaint with the brokerage company or representative. By law, they are required to keep a copy of all complaints on file. If they don’t clear up your concerns you can direct the situation to the SEC, also known as the Securities and Exchange Commission, or the NASD. The best way to avoid these situations is to get the broker’s recommendation in writing and read the prospectus carefully. In the end, an educated investor is the best investor.
Cha-Ching …and that’s all for now. Courtesy of Andrew Horowitz, guest host of Money Girl’s Tips for a Richer Life. Thanks for tuning in to “Money Girl”. As a reminder, if you are interested in learning more about mutual funds, go to iTunes or Audible.com right now and download my book and start on the road to becoming a Disciplined Investor. Listen to my weekly podcast…The Disciplined Investor is also available for free on iTunes.
Or, you can check out my Quick and Dirty Tips podcast! Find me as The Winning Investor, where I’ll give you Quick and Dirty Tips for beating the market.
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
Thanks for listening!
Additional Reading:
Mutual Fund Share Classes Explained
ICI – Mutual Fund Breakpoints Explained
SEC – Breakpoints
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