What is an Allocation Rate?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 September 2019
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An allocation rate is the amount of cash that an investor uses to secure an investment, less any fees or other expenses associated with the purchase of that asset. This means that in order to determine the true rate of allocation, it is necessary to deduct any front-end loads, broker fees, or other costs that were part of the overall acquisition effort. Investors look closely at the allocation rate as a means of determining which mutual funds or brokers to work with, while still keeping the allocation rate as low as possible.

With just about any type of investment purchase, there will be some type of allocation rate that is incurred. Since the rate is usually presented as a percentage, investors will attempt to keep that percentage as low as possible. In many instances, the various fees and commissions are calculated as percentages of the basic purchase price, which makes it easier to determine how much of the overall expense is associated with the investment proper and what percentage of the expense is connected with different fees paid to those who aided in the transaction.


Since the idea is to keep the allocation rate as low as possible, investors will often seek to execute a transaction through brokers or dealers that provide the most cost efficient rates schedules. For example, if one brokerage charges three percent commission for their services and a different broker charges two percent, an investor will look closely at the latter option, since it would lead to a lower allocation rate. Assuming that the two brokerages are similar in terms of the other services they offer, and the fees associated with those services, the investor can control the rate of allocation by working with the less expensive broker.

The front-end load associated with a given mutual fund may also play a role in how an investor manages to keep the allocation rate on each investment as low as possible. If two funds with similar underlying securities and rates of return carry different front-end loads, there is a good chance the investor will go with the one that has the lower front-end load. This means that if one fund as an allocation rate of four percent and the other a rate of five percent, and the investor is likely to earn more or less the same return from either option, there is a good chance that the mutual fund with the four percent front-end load will be chosen. As a result, a higher percentage of the total investment cost is associated with the asset itself, and less with fees and other charges that were incurred as a result of the acquisition.


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