FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProcessing Customer Orders and TransactionsMedium
A client wants to purchase shares of a mutual fund with a front-end load. The fund offers breakpoints. To explain how breakpoints work, a registered representative should inform the client that a breakpoint allows for:
- AA reduction in the redemption fees for larger investments.
- BA reduction in the sales charge percentage for larger investments.
- CA reduction in the fund's expense ratio for larger investments.
- DA reduction in the Net Asset Value (NAV) per share for larger investments.
Show answer & explanationAnswer & explanation
Correct answer: B. A reduction in the sales charge percentage for larger investments.
Breakpoints are discounts on the sales charge for mutual funds when an investor reaches a certain investment threshold. This means a higher investment amount results in a lower percentage sales charge.
Why the other options are wrong
- A. Redemption fees (back-end loads) are separate from front-end loads and are not related to breakpoints.
- C. Expense ratios are generally fixed for all investors in a particular share class, regardless of investment size.
- D. NAV is determined by the fund's assets and liabilities, not by the size of an individual investment.
Mutual Fund Breakpoints
A schedule of discounts on the sales charges of Class A mutual fund shares, where higher investment amounts result in a lower percentage sales charge.
- Applies to front-end loaded funds (Class A shares).
- Investment thresholds are specified in the prospectus.
- Can be achieved through lump-sum investments or Rights of Accumulation/Letters of Intent.
Memory trick: Big Bucks, Better Buy, Lower Breakpoint's the Way.