Big investor: Get that discount on the load

Your Funds

Dollars & Sense

January 26, 2003|By CHARLES JAFFE

MUTUAL FUNDS generally don't print coupons or give rebates.

But some do give discounts, provided you invest enough money.

This month securities regulators warned that some investors in load funds may not be receiving those discounts, thanks to their own naivete and inadequate tracking tools by fund companies and brokerage firms.

The National Association of Securities Dealers issued an investor alert Jan. 15 pointing out that many people are not getting discounts to which they are entitled on the purchase of mutual funds sold with an upfront sales charge, or load. The Securities and Exchange Commission has asked the NASD to push its members to check "the adequacy ... of policies and procedures to ensure that larger mutual fund investors receive promised sales load charge reductions."

"We don't have reason to believe there is widespread fraud here, because it seems like an operational issue where the systems did not keep up with what needed to be done to get these discounts to consumers," said Mary L. Schapiro, NASD vice chairman and president of regulatory policy and oversight. "We're still trying to sort out the scope of the problem at this point, but we do believe there eventually will be restitution to investors.

"If we do find conduct that was willful or reckless, there could be enforcement actions to follow."

The NASD has yet to uncover evidence of widespread fraud but acknowledges that unscrupulous advisers could be overcharging customers.

While regulators sift through the problem, investors would be wise to learn about the issue so they can pursue their own solutions.

The focus of the regulatory activity is "breakpoints," the level of investment where a broker's commission gets cut if you invest big chunks of money. On Class A shares - those where investors pay a commission at the time of purchase and the specific class singled out in the NASD's alert - breakpoints can start at anywhere from $25,000 to $50,000.

By investing past the first breakpoint, a load of 4.5 percent might be dropped to a 4 percent charge, for example. Discounts get bigger as more breakpoints are passed; the load may eventually disappear altogether, though that requires an investment of $1 million at some firms.

It is worth noting that there are no breakpoints for shares in the B and C classes, which carry deferred sales charges and/or higher continuing fees.

Financial advisers who uphold their own commission by putting big-dollar investors into those classes rather than into lower-cost A shares have been pursued by regulators for fraud.

But breakpoints also get tricky, because some fund firms apply them if you aggregate accounts (taxable and IRA accounts, or accounts in one fund held at two brokerage houses) or if your total investment in the fund group crosses a certain threshold.

There can be family discounts, where no individual account qualifies but the total investment by several family members gets over the discount hump.

Most fund firms also have something known as a "right of accumulation," so that any small deposit qualifies for the discount once your entire account gets past the breakpoints. You may also pass a breakpoint if you have investments split between a fund's A and B share classes.

You can also use a "letter of intent" to snag the discount. Say you have $50,000 and want to dollar-cost average the money into the market over a few months; a letter of intent tells the company that you plan to cross the threshold by a certain time and lets your entire deposit qualify for reduced commissions. (If you fail to live up to the letter of intent, you will be on the hook to pay your savings back to the firm.) Your financial adviser should know all the rules and explain them to you so that you can reduce costs.

But because specific rules vary from firm to firm, it's difficult for any individual investor to stay on top of the potential discounts. The fund firms should be able to do it for you but, as Schapiro noted, their tracking technology is still trying to catch up with the times.

Ultimately, if you invested large amounts in A shares and don't believe you received appropriate discounts, be prepared to demand that your financial adviser review the account activity and the breakpoint rules.

From there, don't be afraid to complain to the NASD - www.nasdr.com - to try to set a case into motion.

Said Schapiro: "One thing that must come out of these actions is dramatic simplification of the fund-pricing structure, because it is nearly impossible to make sure investors are being properly credited with the way things are devised now. ... Until we can change the system, investors really need to protect themselves in this area."

Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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