Fee Structures and Other Costs

Understanding fund fees is essential for evaluating investment costs and making suitable recommendations.

Sales Charges (Loads)

  • Front-end load: Deducted from purchase amount (Class A)
  • Back-end load / Contingent Deferred Sales Charge (CDSC): Charged upon redemption (Class B, sometimes Class C)
  • POP = NAV + Sales Charge (for front-end load funds)
  • No-load: No sales charge, but may have 12b-1 fees up to 0.25%

12b-1 Fees (Rule 12b-1)

Annual fee for distribution and marketing expenses, deducted from fund assets (reduces NAV over time).

12b-1 Fee Limits:

  • Maximum distribution fee: 0.75%
  • Maximum service fee: 0.25%
  • Total maximum 12b-1: 1.00% (0.75% distribution + 0.25% service)

Must be approved by the board of directors and a majority of independent (non-interested) directors.

Management (Advisory) Fee

  • Paid to the fund's investment adviser for portfolio management
  • Typically the largest single ongoing expense
  • Disclosed in the prospectus fee table

Expense Ratio

Total annual operating expenses as a percentage of average net assets.

Expense Ratio = Annual Operating Expenses / Average Net Assets

Includes: management fees, 12b-1 fees, administrative costs, legal/audit fees

Does NOT include: sales charges (loads) or brokerage commissions on portfolio trades

Exam Tip: Gotchas

Expense ratio does NOT include sales loads. Loads are separate one-time charges not captured in the annual ratio.

Breakpoints

Volume discounts on front-end sales charges for Class A shares.

  • Higher investment amounts = lower sales charge percentage
  • Each fund sets its own schedule (disclosed in the prospectus)
  • Breakpoint sale (selling just below a breakpoint threshold) is a regulatory violation

Rights of Accumulation (ROA)

  • Existing holdings at current NAV count toward breakpoint levels for new purchases
  • Includes holdings across accounts within the same fund family (individual, joint, custodial)
  • Retroactive: based on current value, not original purchase price

Letter of Intent (LOI)

  • Non-binding pledge to invest a specified amount over 13 months to qualify for reduced sales charges
  • Can be backdated up to 90 days to include recent purchases
  • If not fulfilled, fund retroactively charges the higher sales charge (deducted from escrowed shares)
  • The LOI is not a binding contract - the investor may choose not to fulfill it

Exam Tip: Gotchas

An LOI can be backdated 90 days and covers a 13-month forward period. If the investor fails to meet the stated amount, the fund retroactively adjusts the sales charge from escrowed shares.

Hedge Fund Fees ("2 and 20")

  • 2% management fee on total assets under management (AUM), charged regardless of performance
  • 20% performance (incentive) fee on profits
  • High-water mark - performance fee only charged on gains above previous peak NAV
  • These fees are significantly higher than mutual fund/ETF fees