Quick Answer
Breakpoints are volume discounts on front-end sales charges for Class A mutual fund shares only. Larger investments lower the sales-charge percentage, and each fund sets its own breakpoint schedule, disclosed in the prospectus. A breakpoint sale, selling shares just below a breakpoint without disclosing available discounts, is a serious violation.
With your understanding of share classes and front-end loads, you can now see how breakpoints reduce those loads for larger investments.
What Are Breakpoints?
Breakpoints are volume discounts on front-end sales charges for Class A mutual fund shares:
- The more you invest, the lower the sales charge percentage
- Each fund sets its own breakpoint schedule (disclosed in the prospectus)
- Only available for Class A shares - not B or C
Exam Tip: Gotchas
- Breakpoints apply ONLY to Class A shares, never to B or C.
- Each fund sets its own breakpoint schedule. There is no universal schedule.
- Breakpoints reduce the percentage charged, not a flat dollar amount.
Example Breakpoint Schedule
| Investment Amount | Sales Charge |
|---|---|
| Under $25,000 | 5.75% |
| $25,000 - $49,999 | 5.00% |
| $50,000 - $99,999 | 4.50% |
| $100,000 - $249,999 | 3.50% |
| $250,000 - $499,999 | 2.50% |
| $500,000 - $999,999 | 2.00% |
| $1,000,000+ | 0.00% |
Think of it this way: Breakpoints work like bulk pricing at a warehouse store. Buy one case of water for full price, buy ten cases and the per-unit cost drops. With mutual funds, the "bulk discount" applies to the front-end sales charge percentage.
At $1 million, the sales charge drops to zero because the fund company earns enough from ongoing management fees to justify waiving the load.
Try it: Check which breakpoint tier your investment reaches with the Breakpoint Calculator.
Breakpoint Sales - A Serious Violation
A breakpoint sale occurs when a registered representative sells shares just below a breakpoint level to earn a higher commission:
- This is a violation of the breakpoint disclosure rule
- If a customer invests an amount just below a breakpoint, the representative is required to inform the customer about the breakpoint opportunity
Exam Tip: Gotchas
- If a customer wants to invest $49,500 and the next breakpoint is at $50,000, the representative is required to inform the customer they can invest $500 more to qualify for a lower sales charge. Failing to disclose this is a breakpoint sale violation, even without intent to withhold the information.
- A breakpoint sale is a violation by the representative, not the investor.
What Should You Check on Exam Day?
- Can you explain why breakpoints apply only to Class A shares and never to Class B or C?
- Do you know what a breakpoint sale is and why it is a serious violation?
- Can you explain the representative's disclosure duty when a customer invests just below a breakpoint?
- Do you know whether breakpoints reduce a percentage charge or a flat dollar amount?
- Can you explain why the sales charge can drop to zero at the highest investment tier?