Lesson 4.3: Reducing Front-End Loads

funds typically have lower expense ratios, making them a more efficient way for most people to invest.

Front-end load

because the sales charge is paid up front, the investor has no surprise sales charges when they redeem their shares

Front-end load

the investor loses a portion of their invested capital up front, which impacts their return for some time.

Front-end load

Breakpoints

• are quantity discounts on mutual fund sales charges. The greater the dollar amount of a purchase, the lower the sales charge.

• Breakpoint schedules are set by the fund sponsor; there is no regulatory standard.

Breakpoints only apply to

Class A shares.

who doesn’t qualify for a breakpoint?

investment club or associations formed for the purpose of investing

T or F
Most mutual funds allow investors to combine orders among related accounts in order to achieve a better breakpoint

TRUE

A person who plans to invest more money with the same mutual fund may decrease the sales charges by signing a

Letter of intent (LOI)

A person who plans to invest more money with the same mutual fund and signs an LOI must complete the investment within

13 months

customer who does not complete the investment within 13 months has two options:

• They may pay the difference in sales charges or

• Surrender the escrowed shares.

The 13-month LOI for breakpoint period begins on

the date of the letter.

facts about letters of intent.

• The lower sales charge results in the customer purchasing more shares for the amount they invest.

• The extra shares purchased from the reduced sales charge are held in escrow

• A customer who completes the LOI receives the escrowed shares.

• Appreciation and reinvested dividends do not count toward the LOI.

Letter of intention can be backdated

yes, 90 days

will sales charge be impacted by an increase/decrease of value shares

no, sales change is based on the amount invested

breakpoint sale

the sale of a mutual fund shares in an amount just bellow the level at which the purchaser would qualify for reduced sales. This violates the conduct rules.

It is not the investor's order below the breakpoint that is a violation. It is the representative's failure to disclose the breakpoint that triggers a violation.

True

Rights of accumulation

allow an investor to qualify for reduced sales charges.

Differences are that, unlike breakpoints, rights of accumulation

• are available only for later investments,

• allow for reduced sales charges that will not apply to the first transaction,

• allow the investor to use any growth in the share price to qualify for breakpoints, and

• do not impose time limits.

The customer may qualify for reduced charges when

The total value of shares purchased meets a breakpoint.

For qualifying for rights of accumulation

the mutual fund looks at the current value of the position or the total of the investments made to date and uses the higher of the two.

Combination proviledge

A mutual fund sponsor, often called the fund family, may offer more than one fund. An investor may receive a reduced sales charge by combining investments in two or more funds within the same family to reach a breakpoint.

A person who is instrumental in organizing, selling or managing a limited partnership

underwriter

A term for the underwriter of a Mutual fund

Sponsor

Distributor

Exchange Privilege

• Exchange privileges allow an investor to redeem an investment in one fund for an equal investment in another fund in the same family without paying an additional sales charge.

• This avoids any sales loads on the purchase of the new fund after the original fund is redeemed. This exchange is considered a taxable event, so there may be tax consequences.