Rights of Accumulation vs. Letter of Intent

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Brokers earn commissions based on mutual fund charges.
Brokers earn commissions based on mutual fund charges. (Image: AndreyPopov/iStock/Getty Images)

You can minimize your investment expenses by making use of rights of accumulation rules or a letter of intent. These price-reduction methods pertain to purchases of mutual funds, which are pools of securities such as stocks and bonds. Price discounts always sound appealing, but in some instances an upfront saving can lead to other costs further down the line.

Sales Charges

Mutual fund companies often assess a sales charge that you must pay either when you buy or sell shares. B and C class shares have a back-end load, which means you pay nothing up front but may pay a fee when you redeem your shares. If you buy A class shares, you pay an upfront charge known as a "load." Depending on the fund, the load could amount to as much as 4 or 5 percent of the purchase price. In theory, a $1 million dollar investment could cost you $50,000 in sales charges.

Rights of Accumulation

Some mutual fund companies attempt to entice further investment by offering bulk discounts. Under rights of accumulation rules, the sales charge on front-load shares gradually decreases as your overall investment reaches certain dollar thresholds. Many firms offer discounts known as breakpoints when your investment tops $25,000, $50,000 or $100,000. Some firms waive sales charges altogether if your net investment reaches $1 million. Each fund company sets its own terms for breakpoints under rights of accumulation rules. Some companies apply discounts to any shares you buy within a fund family, the set of funds operated by one firm. Additionally, many firms offer discounts based on households, meaning you include shares bought by your spouse or children in reaching breakpoints.

Letter of Intent

It can take time to reach breakpoints through rights of accumulation, but a letter of intent entitles you to an immediate discount. A letter of intent is a commitment to acquire additional shares in a particular fund within a specific timeframe. Rules vary between funds, but an LOI typically covers a period of 13 months. The price you pay for shares bought today is based on breakpoints you should reach based upon purchases you plan to make in the next 13 months. For example, you could buy $1,000 of shares today, but pay the same low sales charge you would pay if you were buying $25,000 or $50,000 in shares.

Considerations

Using rights of accumulation, you and your broker can easily track your sales charges. Your out-of-pocket charges are always based on your current purchases and holdings. With an LOI, you receive an upfront discount that the fund company can reverse if you fail to follow through on your proposed investment. In such instances, fund companies retroactively assess fees that deplete your holdings. Therefore, you should carefully consider your overall financial situation and long-term plans before committing yourself to making additional share purchases.

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