Breakpoint and Share-Class Decision
A client wants to invest $95,000 in a mutual fund family. The fund offers Class A shares with a 5.75% front-end load that breaks at $100,000, Class B shares with a 5% contingent deferred sales charge that declines over six years and converts to Class A after eight years, and Class C shares with a 1% level load and a 1% CDSC for one year. The client plans to add $10,000 within four months from a maturing certificate of deposit and expects to hold the investment for at least 10 years. She is in the 32% tax bracket and wants to maximize the amount invested now. The representative recommends Class B because "there is no upfront cost."
1. Evaluate the representative's recommendation and determine which share class best fits the client's facts.
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The Class B recommendation is weak. Class B shares carry a 5% CDSC that declines over six years, plus higher annual expenses than Class A, and they convert only after eight years. For a client who plans to hold at least 10 years, the higher ongoing costs outweigh the avoided upfront charge. The "no upfront cost" framing ignores the back-end charge and the expense drag.
Class A is likely better. The client is $5,000 short of the $100,000 breakpoint, and she plans to add $10,000 within four months. She should ask whether the fund family will aggregate the purchase under a letter of intent, which would apply the reduced load to the full $95,000 if she reaches $100,000 within the stated period. If the breakpoint reduces the load, the upfront cost falls and the lower annual expenses apply for the full holding period. Class C is designed for shorter horizons and carries a level load, so it is not the best fit for a 10-year hold.
2. How should the letter of intent and the pending deposit affect the timing and the advice?
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A letter of intent lets the client qualify for the breakpoint on the initial purchase by committing to reach the threshold within a set period, often 13 months. The client's planned $10,000 deposit fits comfortably within that window. You should explain that if she fails to complete the commitment, the fund may retroactively charge the higher load on the shares purchased at the breakpoint, so she should be confident about the deposit.
Timing matters. If she invests the $95,000 now under a letter of intent, she gets the reduced load on the full amount. If she waits four months to invest $105,000, she also reaches the breakpoint but loses time in the market. Given her 10-year horizon, investing now with the letter of intent is reasonable. You should also confirm the actual breakpoint schedule and load from the fund's prospectus, because share-class terms vary by fund family, and document the comparison you gave her.