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Excessive Activity and Other Mutual Fund Claims

Mutual funds are one of the most popular investment tools that investors use for retirement and other financial goals.  These investment products are managed by asset management or investment management companies who earn a fee in exchange for their services.   Due to the various fees associated with mutual funds, investors should be on the lookout for potential abuse, including but not limited to excessive mutual fund trading or failure to maximize potential breakpoints.  Of course, mutual funds are also subject to the risks of market volatility and financial losses, and thus, investors can be defrauded in more ways than mentioned below.  

Investors generally can incur fees when either a mutual fund is purchased, when a mutual fund is sold, on a continuous basis throughout the life of the investment, or a combination of all three.  Additionally, a client's financial advisor may also be entitled to an additional fee or commission based upon various factors set forth by the mutual fund company or the brokerage firm.  As a result of the numerous ways that mutual fund companies and financial advisors can earn fees, in some cases hidden fees, investors should be on the lookout to determine if their are paying excess fees.  

Excessive Mutual Fund Trading

Mutual funds are generally meant to he held for an extended period of time in order to maximize the asset manager's expertise over a longer period of time and to generate investment returns sufficient to overcome the costs associated with owning the mutual fund.  If a financial advisor engages in frequent and excessive trading or switching of your mutual funds in a short period of time, without any legitimate purpose other than to earn fees, then this conduct should raise a "red flag."  Investors should be aware that selling an existing mutual fund and buying another mutual fund (also known as "switching") could generate a "switch fee."  If your financial advisor has switched your mutual funds within a short period of time, then the brokerage firm may be liable for mutual fund fraud.

Break Points
Investors generally can receive volume discounts on commissions when purchasing mutual funds.  In other words, the more you invest, the greater the discount to which you may be entitled.  But there are other ways to earn a breakpoint discount. For example, you may be able qualify for a breakpoint discount based on combining your current purchase with:

  • Purchases you made at different times

  • Purchases you intend to make in the future

  • Purchases of other funds in the same family of funds

  • Purchases you made in several accounts, even accounts at other firms

  • Purchases by your close family members, such as your spouse or child

Where a break point exists, brokerage firms are required to disclose this information to the investor.  Thus, if a financial advisor recommends, for example, multiple and substantially identical mutual funds where one of the mutual funds alone would have received a discount, then the recommendation is unethical and is considered a violation of FINRA rules. Brokers engaging in this behavior are subject to mutual fund fraud claims and can be held liable for the financial losses of their customers.

The attorneys at Lufrano Law, LLC are experience in brining excessive activity and other mutual fund misconduct claims.  Please contact us today for a free, no-commitment consultation.

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