Quick Answer
A letter of intent is a non-binding pledge to invest a set amount over a period the fund's prospectus sets, usually 13 months, to get breakpoint pricing on all purchases now. Many funds let investors backdate it, usually up to 90 days. Unfulfilled pledges trigger a retroactive, higher sales charge collected from escrowed shares.
Rights of accumulation help investors who have already built up holdings. But what about investors who plan to invest a large amount over time? A letter of intent lets them lock in breakpoint pricing upfront.
How a Letter of Intent Works
A letter of intent (LOI) is a non-binding pledge to invest a specified amount over a set period, usually 13 months, to qualify for breakpoint pricing. Each fund's prospectus sets its own LOI terms, so treat the numbers below as the usual terms rather than fixed rules:
- The investor gets the reduced sales charge on ALL purchases during the LOI period
- Many funds let it be backdated, usually up to 90 days, to include recent purchases
- The fund holds some shares in escrow as collateral
- The LOI is not binding. The investor is not legally obligated to complete the investment
Exam Tip: Gotchas
- An LOI is not binding. The investor can walk away, but they lose the reduced sales charge.
- 90 days backdating and 13 months forward are the usual prospectus terms and the numbers the exam tests. The fund's prospectus sets the exact window.
Think of it this way: An LOI is like a loyalty card at a coffee shop that gives you the discount upfront. You promise to buy 50 coffees over the next year, and they give you the bulk rate starting today. If you only buy 20, they charge you the difference for the coffees you already drank at the lower price.
What Happens If the LOI Is Not Fulfilled?
If the investor does NOT invest the pledged amount within the LOI period (usually 13 months):
- The fund retroactively charges the higher sales charge that should have applied
- The difference is collected from the escrowed shares
- The investor keeps all shares purchased, but pays the correct (higher) sales charge after the fact
Exam Tip: Gotchas
- Escrowed shares protect the fund, not the investor. They cover the sales charge difference if the LOI is not fulfilled.
Key LOI Terms
| Term | Detail |
|---|---|
| Duration | Usually 13 months from the date of the LOI (or from the backdated start), as set in the fund's prospectus |
| Backdating | Many funds allow it, usually up to 90 days, to capture recent purchases |
| Binding? | No - investor is not obligated to invest |
| Escrow | Fund holds shares in escrow to cover potential sales charge adjustment |
| Penalty for not completing | Higher sales charge applied retroactively (from escrowed shares) |
Example
An investor signs an LOI to invest $50,000 over 13 months in a Class A fund. The breakpoint at $50,000 gives a 4.50% sales charge instead of 5.75%:
- All purchases during the 13 months get the 4.50% rate immediately
- If the investor only invests $30,000 by the end of the period, the fund retroactively adjusts to the 5.75% rate and collects the difference from escrowed shares
Exam Tip: Gotchas
- Under the usual terms, an LOI can be backdated 90 days and applies for 13 months going forward. If the investor signed the LOI on June 1 and backdates it to March 3, the 13-month period runs from March 3 to April 3 of the following year.
- Under the usual terms, the 13-month period is measured from the LOI date (or backdated date), not from the first purchase.
Try it: See whether an LOI gets your investment over the next breakpoint with the Breakpoint Calculator.
Combining an LOI With Existing Holdings
An LOI is not the investor's only credit toward a breakpoint. Rights of accumulation let the fund count shares the investor already holds in the same fund family toward that breakpoint too.
If an investor already holds $35,000 in a Class A fund and signs an LOI to invest $15,000 more, the existing $35,000 (counted through rights of accumulation) plus the $15,000 pledged under the LOI reaches a $50,000 breakpoint.
The LOI then locks in the reduced sales charge on every purchase made during the LOI period. Without it, only the purchase that finally pushes the running total past $50,000 would get the reduced rate.
Exam Tip: Gotchas
- The LOI's own pledged amount is not always the whole breakpoint total. Add any existing eligible holdings (rights of accumulation) to the pledged amount before deciding which breakpoint applies.
What Should You Check on Exam Day?
- Can you explain how a letter of intent lets an investor lock in breakpoint pricing right away?
- Do you know the usual LOI period and backdating window, and that the fund's prospectus sets them?
- Can you state what happens if an investor does not fulfill the pledged amount?
- Do you know why escrowed shares protect the fund and not the investor?
- Can you explain why a letter of intent is not a binding legal obligation?