Pershing

Calculating the Benefits of Conducting Mutual Fund Business on the Pershing Platform

Issue 12, 2010

When it comes to breakpoints, each mutual fund company establishes its own formula for determining what investors are entitled to receive. It’s not an easy road to navigate. In a recent conversation with Brendan Sullivan, a director at Pershing and manager of its Mutual Fund Operations Department, he spoke about Pershing’s industry-leading mutual fund breakpoint calculator, available through NetX360™ and how it can help you streamline your recordkeeping, help you build your businesses and provide better service to your clients.

Understanding the Importance of Breakpoints

Investors who buy mutual funds that are sold with front-end sales loads often are provided the opportunity to pay reduced sales loads based on the dollar amount of their purchase or series of purchases. The level at which the discount is applied is commonly referred to as a “breakpoint.” The higher the level of investment, the more likely an individual is to qualify for a breakpoint discount. For example, a mutual fund might charge a front-end sales load of 5.5 percent for purchases less than $25,000; 5.25 percent for purchases between $25,001 and $50,000; 4.75 percent between $50,001 and $100,000; and so on. Each mutual fund or family of funds offers different breakpoints and these terms vary from one fund to another. Breakpoint discounts increase the potential earning power of an investment by allowing more of an investor’s money to be invested in the fund instead of paying it out in sales charges.

The Origin of the Calculator

Brendan noted that Pershing’s mutual fund breakpoint calculator found its origins in the industry-wide breakpoint scandals of 2003-2004. “In 2004, a joint NASD/industry task force report came out when the National Association of Securities Dealers (now known as FINRA) was conducting a lot of breakpoint surveys of broker-dealers to ensure investors were receiving the best price,” said Brendan. Around that time, Pershing saw an opportunity to help you provide investors with top-level service by tapping into the National Securities Clearing Corporation (NSCC)’s file “Mutual Fund Profile II,” which contained a wealth of crucial information: breakpoints, breakpoint eligibility and, importantly, breakpoint linking rules.

“Each fund family has their own, unique rules about who can associate their assets together to achieve breakpoint discounts,” said Brendan. “Most fund companies typically use household members: so it would be parents and children under the age of majority, which, unfortunately, does vary by fund family. However, there are some fund families that extend benefits to nieces and nephews, brothers and sisters, grandparents, as well as common law marriages and domestic partnerships.”

What Makes Pershing’s Breakpoint Calculator Calculate

Pershing’s calculator is populated with all of the mutual fund family rules around breakpoint discounts. However, in order for a client to receive the best breakpoints—and, thus, price—on his or her transactions, you need to be aware of all of a client’s assets. That is why it is essential for you and your clients to work together openly. Investors need to keep you in the loop—ensuring they know about any mutual fund holdings, as well as those of family members, both inside and outside of retirement accounts, and those made with other brokers or directly through the fund company.

“What our breakpoint calculator does,” explained Brendan, “is that it looks across Pershing’s entire platform, encompassing the rules that we receive directly from the fund families to locate any assets on our books that can be used to help an investor receive a discount on that particular trade.” The calculator looks at, in order of hierarchy: the account where the trade is, every other account that has the same Social Security number and then to the relationships table to locate any other accounts or Social Security numbers that are a permissible relationship for that fund family.

To ensure consistency and that the investor is getting the right price, the calculation is done twice, first at the time of trade entry and then when the market closes. The calculator has a rule that can be turned on to advise you of breakpoint threshold percentages, so that you know when a trade is close to achieving a new breakpoint level. The closing calculation is a comparison of three different values: the value that was entered on the order, the highest value of all transactions entered by you—in other words you may have placed multiple trades for the client in the same fund family and Pershing’s calculated value. “The largest of the three,” said Brendan, “is applied to the transaction when we send it off to the fund family.”

The key to Pershing’s calculator is the “relationship” functionality in NetX360, which allows you to create relationships between investors. This function can be accessed within the Account Workbook by clicking the Profile tab and choosing the Relationships view. As Brendan stressed, “The system doesn’t make assumptions, other than to reciprocate the relationships set up by you: if I linked myself to my spouse, then my spouse is linked to me. Pershing’s breakpoint calculator was designed to comply with mutual fund prospectuses to the letter. It is a way to ensure that you are compensated appropriately while your client pays the price to which they are entitled.”

Calculations That Are Only As Good As The Data

According to Brendan, “It’s a very sophisticated calculator.” He noted that he is confident of the profile data based on one very important fact: the Financial Industry Regulatory Association (FINRA) relies on it. “FINRA’s breakpoint tool uses the same profile data ours uses.” The calculator highlights the importance of consolidating mutual fund assets onto a single platform. “Our calculator does not consider directly held assets or those held at other broker-dealers—it only considers assets held at Pershing. So, by consolidating assets onto Pershing’s platform, your client will have the best opportunity to receive the best possible price.

To learn more

Are you taking full advantage of Pershing’s breakpoint calculator? You are if your mutual fund business is being conducted through NetX360 and you have the proper relationships set up. To learn how to how to create, edit and delete account relationships in NetX360, simply go to Resources in NetX360 and type “relationships” into the search box.

For Professional Use Only.