Sales Practices

Understanding fees is one thing, but knowing the rules around how shares are sold (and how investors can reduce costs) is equally important. This section covers breakpoints, letters of intent, rights of accumulation, and dollar-cost averaging.

Breakpoints

Breakpoints are volume discounts on the front-end sales charge for Class A shares only:

• Breakpoint levels are set by the fund (e.g., $25,000, $50,000, $100,000, $250,000, $500,000, $1,000,000)
• As the investment amount increases, the sales charge percentage decreases
• At $1,000,000, many funds charge no sales load at all

Key violations:

• Breakpoint selling: Soliciting a purchase just below a breakpoint to earn a higher commission. This is prohibited
• Selling dividends: Recommending a purchase just before an ex-dividend date so the investor immediately receives a taxable distribution (and pays a sales charge on money that's immediately returned). Also prohibited
• Failure to inform a customer of available breakpoints is a FINRA violation

Exam Tip: Gotchas

• Only Class A shares offer breakpoint discounts. Class B and C shares do not have breakpoints.
• Breakpoint selling is a FINRA violation. If a client wants to invest $48,000 and the next breakpoint is $50,000, the rep must inform the client of the breakpoint opportunity.

Letter of Intent (LOI)

A letter of intent is a written commitment to invest a specified dollar amount over 13 months to qualify for a breakpoint discount:

• The reduced sales charge applies to all purchases during the 13-month period, including the first
• LOI can be backdated up to 90 days to include recent purchases
• The fund holds a portion of shares in escrow (~5% of the LOI amount) as collateral
• If the investor fails to meet the commitment, the escrowed shares are redeemed to cover the difference in sales charges
• LOI is not binding; the investor is not obligated to invest the full amount

Example: An investor signs an LOI for $100,000. They get the breakpoint discount on all purchases from day one. If after 13 months they've only invested $60,000, the fund redeems enough escrowed shares to cover the additional sales charge they should have paid at the $60,000 level.

Exam Tip: Gotchas

• LOI is not binding. The investor will not be forced to invest, but escrowed shares will be redeemed to cover the higher sales charge.
• LOI can be backdated up to 90 days to include recent purchases toward the commitment amount.

Rights of Accumulation (ROA)

ROA allows investors to count the current market value of existing holdings (not original cost) plus new purchases to qualify for breakpoints:

• Applies across accounts in the same fund family (individual, joint, IRA, custodial)
• Some funds allow combining holdings of family members in the same household ("householding")
• Unlike LOI, ROA is an ongoing benefit that applies to every subsequent purchase

Key distinction: LOI looks forward (committing to future purchases), while ROA looks at current value of what you already own.

Exam Tip: Gotchas

• ROA uses current market value, not original purchase price. If you bought $40,000 worth of shares that are now worth $50,000, ROA counts the $50,000.

Dollar-Cost Averaging (DCA)

Dollar-cost averaging is an investment strategy (not technically a sales practice), but it is frequently tested alongside breakpoints:

• Investing a fixed dollar amount at regular intervals regardless of share price
• Results in purchasing more shares when prices are low and fewer shares when prices are high
• Lowers the average cost per share below the average price per share over time

Calculation: Average cost per share = Total amount invested / Total shares purchased

Example:

• Average price per share = ($25 + $20 + $50) / 3 = $31.67
• Average cost per share = $1,500 / 55 = $27.27
• Average cost ($27.27) < Average price ($31.67)

Important limitation: DCA does not guarantee a profit and does not protect against loss in declining markets.

Exam Tip: Gotchas

• Average COST per share and average PRICE per share are two different numbers. DCA lowers the average cost (total invested / total shares) below the average price (sum of all prices / number of periods). The exam may ask you to calculate both and compare them.
• DCA does NOT guarantee profits. It lowers your average cost, but it does not protect against losses in a sustained declining market.