A right of accumulation (ROA) allows investors to accumulate their securities and the securities of certain related entities, such as a spouse and children, toward achieving the investment thresholds at which breakpoint discounts are available. In simpler terms, the rights of accumulation (ROA) are the rights that permit a mutual fund shareholder to gain a reduction in the sales commission charges when the amount of the mutual fund purchases and the amounts already held equals a rights of accumulation (ROA) breakpoint.
What is a Breakpoint?
The breakpoint is the threshold amount for the purchase of a load mutual fund’s shares beyond which an investor qualifies in order to avail a reduction in the sales charge. The investors are lured with additional discounts on the investments through the concept of the breakpoints. The rights of accumulation breakpoint push to make higher additional investment in the mutual funds. Investors generally aim to channel their savings productively into investments repetitively. These breakpoints incentivize the investors for the repetitive purchase of the mutual funds in a lump sum or a staggered manner.
These Rights of Accumulation (ROA) breakpoints are set on various levels. These levels are designed to offer investors a discount on sales costs when making more significant investments. The mutual fund determines the right of accumulation breakpoints and is wholly integrated within the fund distribution process. The shareholders have to request this option of exercising the ROA in writing with a list of all account numbers that the shareholder would aim to link and signed by all the linked shareholders. Every mutual fund sets their terms for breakpoints. The description and eligibility of these breakpoints have to be mentioned by the mutual funds in their prospectus. Once an investor hits a specific breakpoint, they will face a lower sales charge and save money.
Many firms would offer breakpoint discounts as the investment value would reach $25,000 or $50,000, and certain firms would altogether waive off the sales charges if the investment breakpoint touches $1 million. Beyond $1 million, any additional investment that will be made, the investor will not have to pay any sales charges on that investment.
Linking of Accounts to Rights of Accumulation:
As mentioned above, the investors can link accounts for the Rights of Accumulation. The below is the list of accounts that can be linked:
- A shareholder may accumulate investments in Davis Funds made by an investor or the immediate family of the investor: their spouse or minor children (under the age of 21).
- Trust accounts that are established by the above individuals.
- Solely controlled business accounts.
- Single participant retirement plans.
- In addition to the above, the organized groups can also aggregate accounts as long as the group is formulated for a purpose other than buying mutual fund shares.
FINRA Rights of Accumulation Guide on Breakpoint:
The Financial Industry Regulatory Authority (FINRA) has provided the following guide for mutual fund ROA breakpoints. The Rights of Accumulation Breakpoints will only come into effect when an investor’s holding exceeds $250,000.
- For an investment of less than $25,000, the sales charge will be around 5%.
- At least $25,000, but less than $50,000, the sales charge will be 4.25%.
- At least $50,000, but less than $100,000, the sales charge will be 3.75%.
- At least $100,000, but less than $250,000, the sales charge will be 3.25%.
- At least $250,000, but less than $500,000, the sales charge will be 2.75%.
- At least $500,000, but less than $1 million, the sales charge will be 2.00%.
- $1 million or more, there will be no sales charge that will be applicable.
The rights of accumulation breakpoint are essential for high net worth investors buying shares through a financial intermediary that charges the fund’s front-end sales charge.
Illustration of Rights of Accumulation:
Let’s understand the same with an example for the same.
An investor has been regularly investing $5,000 per year in a fund named PQN. Since the last five years, the investor has accumulated an investment corpus of around $25,000 within the fund. The investor bought securities worth an additional $5,000 of Fund PQN Class A shares within the fifth year. A sales charge of 5% will be applicable. An intermediary will charge the front-end sales charge. The investor had already been invested in this fund, and his new investment has been added to the existing investment of $25,000 in Fund PQN’s Class A shares. The fund follows the same breakpoint schedule as outlined by FINRA mentioned above.
The latest investment in the fund by the investor has taken his investment value to $30,000. Hence, due to the additional purchase of the Fund PQN, the investor is now eligible for a lower charge of 4.25% as against the 5% that the investor has paid. Now, as the investor increases his investment within the Fund, he would be entitled to more benefits as he crosses the various other breakpoint levels within the fund. The entire investment corpus will be charged a lower sales charge cost of 4.25% against 5%.
Summing it up:
The Rights of accumulation incentivizes the investor to ensure that multiple investments have been made in the mutual fund. The breakpoints system lures the investor to stick to a particular mutual fund rather than diversifying his funds into various mutual funds. The investor can also claim the rights of accumulation by associating his investments and clubbing his account with accounts mentioned above and avail the benefits of the overall reduction of the sales charge. Each mutual fund will have its own strategy to determine the rights of accumulation breakpoints, and all of this information will be listed in their prospectus. The information helps the investors decide upon investing in the fund for a longer duration or a shorter one depending upon the breakpoints and the waiver received at each point. The rights of accumulation are an extremely efficient system. It induces the investors to keep investing within the financial markets as the gains crossing each breakpoint are savings that keep them motivated to invest continuously for a longer time frame.