Many investors are aware of a fund's management fees and breakpoints when determining how much they invest in a particular fund. However, they may not be familiar with Net Asset Value transfers, one of the lesser known ways to reduce or eliminate sales charges.
Because these are only available in a limited number of mutual funds, and terms and conditions differ from one fund to another, it can be extremely difficult to identify them.
Failure to communicate NAV transfer rules can be costly to investors and brokerage firms.
Investors miss out on the savings they are entitled to and brokerage firms may be liable for FINRA fines.
In fact, over the past decade Finra has issued fines regarding failures to have adequate systems and procedures to identify NAV transfers. These fines range from $100,000 to $250,000 and include a number of high-profile firms.
Beyond the fines, the expense of setting up remediation plans for eligible customers who qualified for - but failed to receive - the benefit of NAV transfer programs can easily run into millions of dollars.
To ensure trades are done in good order, there are three things to be done:
1. Make sure advisors understand what NAV transfers are, and where to find information on them.
2. Ensure easy access to the proper documentation - usually the prospectus with in force rules from the original trade date as well as the Statement of Additional Information.
3. Institute an in-house NAV transfer program with supervisor oversight and the requisite training.
FINRA's website defines NAV transfers as "opportunities in which you can purchase class A shares of a mutual fund without paying a front-end sales charge if you invest some or all of the proceeds from the sale of a mutual fund in another mutual fund family for which you paid a front-end or contingent deferred sales charge within a specified period of time."
Only a limited number of funds offer NAV transfers and there are no standard rules in play - the requirements vary among fund families.
Advisors can determine if a mutual fund offers NAV transfers by reading the prospectus and/or SAI. But be forewarned - each fund refers to NAV transfers differently (e.g., transfers, purchases and redemptions) and in different places within the prospectus and/or SAI.
Looking up information in the prospectus or SAI sounds easy - as long as you are looking at the right documents. On average, nearly 4% of all mutual fund and ETF CUSIPs are affected by a filing change on EDGAR each day.
On the busiest day, nearly 23% of fund CUSIPs are affected by a filing change on EDGAR - representing over 7,110 fund CUSIPs. You need to ensure you have the most up-to-date documents to be certain that NAV transfer information is available and it is being accounted for properly.
Access to a prospectus look-up tool synchronized with the most recent EDGAR filings can offset this challenge and alleviate any uncertainty.
A second challenge is making sure you have the original trade date prospectus - especially if the investor purchased the fund five or 10 years ago.
If the investor didn't keep their original prospectus, and odds are that they didn't, you will need to track this down from the fund or take advantage of any technology that provides easy access to historical compliance documents, available even online from EDGAR.
Bottom line: It is essential to have tools in place that can identify NAV transfers, and for both current and historical documents, so that you can ensure that you have the right information for the right date or date range.
Having these assurances not only gives you peace of mind, but also provides confidence in your next internal or external audit.
Knowing when NAV transfers apply and finding the right information can require a little bit of detective work. To save time and avoid Not in Good Order trades, the firm should have a formal NAV transfer program in place with supervisory oversight as well.
Such a program can help flag when NAV transfers may be triggered and help ensure that any discounts are communicated and applied before trade settlement.
Some firms might even want to build flags into the order entry system reminding advisors to determine if the transaction is eligible for NAV transfer discounts and to ensure this box is checked by supervisors who approve the trade. Investing in technology, such as prospectus look-up tools that make finding NAV transfer information easy and efficient, might also be worth the investment.
Gavin Long is a product manager at Broadridge Financial Solutions, which provides securities processing, clearing and investor communication.