The Mutual Fund Scandal You Arent Hearing About, a "Guarding Your Wealth" exclusive.

There is another Mutual Fund Scandal on the horizon. The NASD estimates that 20% of Mutual Fund transactions failed to give discounts that were due to investors. Many investors were cheated out of breakpoints when buying commission-based mutual funds. Guarding Your Wealth" is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the president of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients investments. Please visit our website, www.guardingyourwealth.com to learn more about securing your financial future.

The Mutual Fund Scandal You Arent Hearing About.

Lately, the press has focused on the Mutual Fund Late Day-Trading Scandal. But there is another scandal that could have had a much greater impact on your investments. The NASD estimates that investors did not receive discounts in approximately one out of every five transactions that were eligible for discounts."

This scandal has to do with consumers being cheated out of the breakpoints theyre entitled to when buying commission-based mutual funds. To better understand this problem, you first have to understand your choices. One choice is to pay all the commission up-front (A shares). Another is to pay it through a surrender penalty if you pull your money out of that fund within 7 years (B shares). B shares have higher internal fees so that you end up paying the fund company back even if you stay in the full 7 years. Regardless of when you pay, the broker gets paid right away.

Most people are not aware that mutual fund companies allow you to pay less commission up-front when you invest more money. For instance, a typical commission-based fund family charges an up-front commission of 5.75%. But if you invest $50,000 or more in that mutual fund family the commission is reduced. The more invested, the less commission percentage you pay. Invest $250,000 and the commission drops to 2.5%. This is called a commission breakpoint and is available on the up-front, A shares option.

On the other hand, there are no breakpoints on the B shares option. The result is that if you invest more than $50,000, the broker has a financial incentive to sell you B shares instead of A shares. They make more money because you are overcharged and most times you dont even know it.

Brokerage firms are supposed to have internal controls to prevent brokers from over-charging clients by selling them the wrong share class. Typically, a brokerage firm will limit ($100,000) how much can be invested in B shares. This is sort of like trusting the fox to guard the hen house, though, because if the broker makes more money so does the brokerage firm.

Brokers have found other creative ways to overcharge their clients who purchased mutual funds. They may recommend A shares for some money and B shares for the rest. Or they can spread the money between several mutual fund families so that you dont earn the breakpoints you would get if all of the money was invested in the same mutual fund family.

It is very difficult for the average investor to know how much they were charged. Your purchase confirmation doesnt show how much you paid in commission. Very few people read the prospectus to see if breakpoints are available. Most dont understand the difference between A and B shares and rely on their broker to decide which is best.

The NASD tells you to ask yourself these questions to see if you might be affected: 1) Have I purchased a mutual fund with a front-end sales load? 2) Have I purchased additional funds in the same fund family? 3) Have close family members purchased shares of this fund or fund family? 4) Is the total of these purchases together greater than $25,000?

The process to find out if you have been overcharged is involved. For A share purchases, compare the price you paid with that days Net Asset Value price. The percentage difference is how much you paid in commission. The prospectus will tell you any breakpoints you were entitled to. Youll also want to see how much you invested in other fund families, and if you would have received a better breakpoint if you had stayed with the same fund family. For B share purchases, one red flag is if you purchased $100,000 or more.

Of course, the best solution is to avoid paying commissions altogether. Some advisors work the way I do, where instead of paying commissions, clients pay an ongoing fee based on their accounts value. In the industry, this is referred to as being a fee-based advisor. This way you know exactly what youre paying and you keep maximum control and flexibility.

If you have suspicions, it may be worth paying your accountant to check it out for you. The NASD requires firms to refund discounts if they were never paid. If you would like my help call toll-free 877-827-1463 or email me at jeff@guardingyourwealth.com. You can also find out more by reading the Investor Alert at www.nasd.com.

Mr. Voudrie is a Certified Financial Planner and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN.