Fund investors need to be alert to discounts

PERSONAL FINANCE

March 09, 2003|By EILEEN AMBROSE

BUY A GALLON of ketchup, a gross of cat food or 10 miles of duct tape and you expect to get a price break. But people may not be aware that by investing a sizable amount in certain mutual funds, either all at once or over time, they're due a discount, too.

The discount involves "breakpoints," the levels at which investors have purchased enough shares that they get a reduction on the upfront sales charge. "No load" funds don't carry sales charges, so breakpoints don't apply to them.

Breakpoints are a hot issue since the National Association of Securities Dealers' Philadelphia office discovered in a routine review last fall that investors weren't getting the discounts due them. Since then, the NASD and the Securities and Exchange Commission have scrutinized several dozen brokerage firms of all sizes.

"In virtually every exam we did, we found to a greater or lesser extent, that investors weren't always getting their breakpoint they were entitled to," said Mary L. Schapiro, NASD vice chairman and president of regulatory policy and oversight.

As a result, the NASD put an investor alert on its Web site. The Investment Company Institute, a fund trade association, has produced an online guide at www.ici.org to explain the discounts to investors. And, at the request of the SEC, the NASD formed a task force last month to recommend how funds and brokerages can prevent investors from being overcharged.

Schapiro said it's not known how much investors have overpaid. She added, "We haven't seen evidence of intentional wrongdoing."

The discounts apply to funds that have front-end sales charges, which are "Class A" shares typically sold by brokers.

Breakpoints vary from fund company to fund company.

Generally, they work like this: An investor buying less than $25,000 worth of fund shares pays an upfront sales charge of 5.75 percent. If he invests more than $25,000 but less than $50,000, the sales charge drops to 5.50 percent. The charge continues to drop as purchases go up, and may disappear once $1 million or more is invested.

It may appear that discounts are for big-time investors, but those making smaller purchases over time may also qualify.

One way is through a "letter of intent," where the investor declares her intention to buy enough fund shares over a period of months to qualify for the discount. For example, she may receive the discount by agreeing to buy $50,000 worth of shares over 13 months. If she doesn't follow through, the fund company will recoup the higher fee.

Another way for smaller investors to get the discount is through "right of accumulation." It's under this more complex method that problems have occurred, Schapiro said.

In this case, an investor gets a discount if new shares purchased, combined with those already acquired, are enough to reach the breakpoint.

For example, say the breakpoint occurs at $50,000. If you own $30,000 worth of shares, and invest another $25,000, you would be eligible for the discount on the new $25,000 investment.

It's figuring the amount of shares already accumulated that can get complicated.

Investors usually can count shares owned within the same fund family. They may be able to include fund shares owned in a retirement account or 529 college savings plan, or shares owned by a spouse or other relatives in the same household.

A fund companymay allow investors to count Class B or C shares, which don't have upfront sales charges, as part of accumulated shares, experts said.

Some fund companies have broader rules. A fund company, for instance, might allow investors to count purchases of universal life insurance and variable annuities or shares owned by a grandparent living in another location, Schapiro said.

While brokers have a responsibility to ask investors about accounts that could help them qualify for discounts, investors have a duty, too, experts said.

"A broker can't guess what you're holding in your safe-deposit box. You have to tell the broker," said Daniel T. McHugh, president of Lombard Securities in Baltimore. "It's just like going to a physician. If you don't tell your doctor you have a large pain in your chest, you're asking for problems."

There are more frequent breakpoints for investments ranging from $25,000 to $75,000, and these investors can make sure they don't miss out on a discount by asking their broker two questions, McHugh said.

"The first thing you can ask is, `How much more do I have to invest to get a lower sales charge?'" he said. "The second question you can ask is, `What in addition to my contemplated investment can be counted toward reaching the next lower commission breakpoint?'"

For details on a fund's breakpoints, investors should check the prospectus as well as the fund's Statement of Additional Information.

Contact your broker if you haven't received a discount you deserve, experts said. If you still feel you didn't get the entitled discount, contact the NASD, Schapiro said.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose @baltsun.com.

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