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What Are The Rights Of Accumulation

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03 Aug 2023

Introduction

Rights of accumulation (ROA) is a term generally used within the American mutual funds market. Rights of accumulation allow an investor to receive discounts on commission charges when making new purchases in class A mutual fund shares. Rights of accumulation come into play when the amount of a new purchase in a mutual fund adds on to the total amount already held in the fund to trigger a right of accumulation breakpoint. Let’s first understand the right of accumulation breakpoint. 

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What is the Right of Accumulation breakpoint?

Put simply, a breakpoint is a threshold investment amount beyond which a shareholder of a mutual fund is entitled to a discount on the sales charge when buying further shares of the fund. Depending on the investment amounts, there can be several threshold values for a particular fund to incentivize continued investments into the fund. 

Why is ROA important?

ROA also allows an investor to club their investments with that of a family member, such as a spouse or children. In general, the terms and conditions of the ROA are decided by the mutual fund company and are mentioned on their prospectus/statement of additional information. Depending on the kind of fund, an investor may also be required to sign a Letter of Intent (LoI) to become eligible for breakpoint discounts.

Rights of accumulation have great importance for high-net-worth individuals who make large investments in mutual funds. While most funds may waive off a portion of sales charges above $25000, sales charges can mostly be completely waived off if the investment amount exceeds $1 million.

The FINRA (Financial Industry Regulatory Authority) suggests the following mutual fund breakpoints:

  • Less than $25,000 - 5.00%
  • Between $25,000 and $50,000 - 4.25%
  • Between $50,000, and $100,000 - 3.75%
  • Between $100,000, and $250,000 - 3.25%
  • Between $250,000, and $500,000 - 2.75%
  • Between $500,000, and $1 million - 2.00%
  • $1 million or above - Nil

These breakpoints work to lure investors for continued investment. However, not all companies offer investors this feature.

To understand ROA using an example, we can consider an investor who has amassed up to $25000 in a fund. This fund comes with a sales charge of 5.00%. As the $25000 value acts as a breakpoint, when the investor makes a further investment in the said fund, he becomes eligible for a discount on the sales charge, say, his sales charge then reduces to 4.25%. 

Conclusion

As is clear, mutual fund companies exercise ROA breakpoints to assure investors constantly keep investing in the funds. In other words, ROA allows for mutual benefit for the buyer and the seller of the mutual fund. While the buyer is incentivized for continued investing, the mutual fund company can sell more of the fund shares and earn profits.

 

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