What is a Mutual Fund?
Among the various financial tools available to investors, a mutual fund is an option to pool together money so that investors can collectively invest in bonds, stocks, and assets. This collection of money is managed by a professional fund manager, who is responsible for investing the money appropriately. If the manager invests well, mutual funds can be very financially beneficial tools for investors.
Mutual Fund Fraud
The stockbroker has to not only invest wisely, but also not mislead the clients. If a stockbroker convinces a client to invest in a fund, they will receive a commission. However, some brokers use this commission as a way to commit breakpoint fraud. The break point refers to the ranges that affect what percentage of commission the broker will receive. This occurs when the broker tells their client to invest in a way that increases their commission, but it does not actually benefit the client. For example, a client has a certain amount of money to invest, and the broker convinces them to invest in multiple, smaller funds. The broker now receives a commission for each fund invested in; however, for this specific client it would have been more advantageous to invest in fewer, larger funds. Therefore, the client will not realize the return they could have received had the broker not committed this fraud.
Another reason why a broker or advisor of the mutual fund will encourage a client to invest contrary to their benefit is that commissions of high-cost funds tend to be higher. However, high-cost funds will not always lead to a higher return on investment. Therefore, when investing in a mutual fund, investors must make sure they are dealing with a reputable advisor who will act according to their fiduciary duty.