Loaded mutual funds charge investors sales fees that compensate the broker for his/her services when accounts are open or closed. These fees often benefit the broker more than the investor.
Loaded Mutual Funds
Certain mutual funds often have sales charges, referred to as loads, which compensate the broker for his/her investment services. Sales loads are typically applied to the front end or back end of mutual funds. Mutual funds with front-end loads assess sales charges to the investor when the fund is opened, while mutual funds with back-end loads assess sales charges when the fund is closed. On funds with back-end loads, sales charges are higher if the fund is closed in the first year, then decline each year thereafter. Once the fund is held for five years, back-end load charges are waived.
Loaded mutual funds are typically a more expensive investment. Investing in a $10,000 front-end loaded fund with a 5% front-end load will cost $500 just to enter the fund. Back-end loaded funds can also be expensive, since they are often held for up to five years. Although there are no-load funds that offer good returns, many brokers convince their clients that loaded mutual funds are their best option. A securities fraud attorney often sees cases where brokers overcharge clients by suggesting loaded funds with sales charges, even though no-load funds provide significant returns to the investor.
Mutual Fund Discounts
Mutual funds with front-end loads, referred to as Class A shares, often have breakpoint discounts that reduce the front-end sales charge. The amount of the discount is based on the size of the investment, and the discount increases as the investment increases. The investment levels at which the discounts become available are called breakpoints. Breakpoint discounts are not offered on mutual funds with back-end loads or on no-load funds.
Breakpoint discounts usually start at investment levels of $50,000, but they may begin with investments of $25,000 in certain funds. According to the Financial Industry Regulatory Authority (FINRA), investors with such investments in mutual funds with front-end loads are entitled to breakpoint discounts. FINRA requires securities firms to refund money to investors who don't receive discounts. When securities firms and brokers deliberately withhold discounts, clients may file investment claims for damages with a securities fraud attorney. According to FINRA and the Securities Exchange Commission, one out of every five investors do not receive breakpoint discounts that they are entitled to from their brokers.
Loaded mutual funds decrease investment returns. For help with securities fraud and claims, contact Meyer Wilson.