Why you should leave DSC funds for good
OK readers, let’s be blunt:
DSC (Deferred Sales Charge) funds serve no good purpose to any investor given the plethora of far better investment alternatives now.
I mean, if someone tells you they can make your money grow faster because they have some superior, proprietary fund to invest in, run away. Fast.
Kudos to Tembela Bohle from Pexels so I could leverage this pic – run away from DSC funds people!!
A Deferred Sales Charge (DSC), is a back-end fee that is charged to a mutual fund investor if they redeem their investment prior to a set amount of time. It is a charge designed to discourage the early redemption or sale of your investment—in this case, mutual funds.
In general, I believe there are three key ways for an investor to deal with a DSC fee:
- Try to have the DSC reimbursed to you. (You’ll need major negotiation skills since the fund advisor is depending on you to pay that fee to keep their yacht!)
- Live with the DSC for a period of time, then sell. Sunk costs but such is life.
- Pay the DSC throughout and ride it out. Not ideal.
Reader case study (quotes include verbatim information from the reader)
I recently got an email from a reader about DSC funds and I figured it would make a good, general, case study for leaving DSC funds for good.
Here is the reader scenario with a few assumptions made about their situation along the way….
Thanks for taking my email and hopefully you can help?
My RRSP is with Fidelity. In four funds. Paying on average more than 2% per fund. (I know, after finding your site – terrible). I told my wife we’ll fix it!
Anyhow, “I would yap and complain to the advisor who I have had for 25+ years and he would convince me every year that it would be smarter to stay rather than leave.” I am almost 68 years of age.
I know for a fact two of those funds have matured from the DSC fees you wrote about with Ken Kivenko on your site – those fees no longer apply.
High fees and trailer commissions are going away, kicking and screaming
I read your post about some all-in-one funds and it seems a great way to invest to meet some of my growth and income needs.
The present value of my RRSP is $162K. “I haven’t contributed any additional monies in a number of years. Mostly because I didn’t want to pay any more fees and I’ve never been a true believer in RRSP at any time. Just a tax deferral that I utilized when I had higher income.”
Here are my questions:
- Shall I consider all-in-one funds for those two existing matured funds?
- What should I do with the other pending funds to mature?
Thanks so much Mark!
I appreciate your email and questions.
I shared your case study with trusted Certified Financial Planner (CFP®) Steve Bridge, from Vancouver. Steve works as an advice-only financial planner with Money Coaches Canada.
As a CFP® who helps clients directly with retirement (and pension) planning, I figured Steve would be an excellent subject matter expert to offer his take on this subject.
First up, my thoughts.
If your DSC funds are near maturity dear reader – please cut the cord and leave those DSC funds for good!
With so many great and simple options available to you now including those desired all-in-one funds available, AND commission-free investing with partner on my site Questrade (affiliate), I think the time is now to make the switch. We’ll discuss more options below!
That said, there are far more considerations and therefore I wanted to bring in Steve who has “been there, done that” with so many other clients in this messy DSC fee position.
Steve, thoughts for our reader?
Thanks Mark and great to be back on the site.
As is almost always the case when it comes to someone’s finances, no individual piece should be looked at in isolation – as you well know.
So often people call or email me too and have ‘just one question’, but in reality, that one piece affects other parts of their finances. They may not see it, but it’s kind of like asking someone to fix just one side of your Rubik’s Cube-that side may look good, but your other sides are now a mess!
For your reader a few questions that came up for me were:
- What are his other sources of retirement income?
- It seems he is married, so do they have a unified drawdown strategy (from their RRSP or RRIF) that will minimize tax as a couple?
- What is their overall asset allocation?
There are more questions but these are my starters!
Getting to his specific situation, I would say that his advisor’s responses don’t really surprise me. The advisor had a vested interest to keep his client’s assets under management, sadly, as long as the investments are ‘suitable’, he or she has done their job. I would have liked to have been a fly on the wall for the 25 years of ‘convincing’ conversations!
While it is a bit late for your reader, for all those years paying higher fees than necessary, I want other readers of My Own Advisor to take heed and have a look at what they are paying in investment fees.
Over 25 years, that little 2% management fee will erode approximately 40% of your profile’s value. I recommend my clients pay 1% or less, which can be done through a robo-advisor, DIY ETFs or mutual index funds, or a portfolio/wealth manager.
I know you’re a fan of this approach and have written many articles about these alternatives as well Mark.
OK, a little more background on deferred sales charges, or DSCs.
Mark, you are correct that from the industry side, they are sold on the premise that having hefty redemption fees in the early years is good for clients, as it stops them from acting on emotion and/or cashing out spontaneously. The theory is good, because oftentimes an investor’s worst enemy is looking back at them in the mirror. Many investors aren’t rational and will buy high and sell low (we’re biologically programmed this way, it’s not our fault!) and act on emotion.
The HUGE problem arises when for one reason or another, an owner of a DSC fund wants/needs to move their investment. To what is often their surprise, they have to pay redemption fees/penalties to get their own money! These fees go down year by year and are usually $0 by the 7th year or so. (The good news is that a nationwide ban for DSC funds is planned for 2022. I remain optimistic!)
Mark, you are spot-on when you suggest finding out the maturity date and any possible redemption fees. If he is close to the end date, it may be worth asking the advisor to waive the fees, or even calling the company that owns the funds directly. After 25 years, they’ve got their pound of flesh so should be okay letting him go.
Whether it’s two funds in question or others for any reader of Mark’s site, I would suggest you find out what the fund performance has been over the past five, 10 and 15 years. Perhaps they are the outliers of actively-managed funds that have out-performed the index? If they are, they may be worth keeping (this decision goes hand-in-hand with an overall plan, asset allocation and drawdown strategy), especially if there a similar lower fee fund that he could move to.
Otherwise, the reader could look at hiring someone to manage the money for him, or he could potentially do it himself – again via one of those options I listed above such as an all-in-one product with a brokerage, by getting support from a low-cost robo-advisor or working with a portfolio manager who charges 1% or less.
You can learn how a robo-advisor can support lower-cost investing and help you train your investing brain here.
I also have a great partnership with Wealthsimple should you wish to explore them.
Steve: I thought the comment “never been a true believer in RRSP” was an interesting one, as I have heard it before. I think there are two parts to this I would share with your readership:
- Some people don’t understand that RRSPs are a tax-shifting vehicle. They shift tax owing from a higher-earning year to a lower-earning year (normally when you are retired or have little to no other income). They don’t make tax disappear but can save you a lot of money if used right.
- Some people confuse the account with the investments. People will say that they ‘bought some RRSPs’ when this is not possible. It’s like saying, “I bought some savings accounts.” I think they are actually disappointed/upset with the investment performance, likely due to owning high-fee actively-managed mutual funds.
While I have mentioned it already, I cannot stress how important a solid drawdown strategy is. This means retirement income strategies need to look at all sources of income (pensions, CPP, OAS, RRSP/RRIF, TFSA, non-registered accounts, etc.) and then deciding how much to take from each and when. The benefit is that you will minimize taxes payable and make your money last as long as possible, and will also save on estate taxes (these, not probate are the real damaging taxes at death).
If you’re in your 40s or 50s you may not think this matters to you, but you can be setting yourself up for success by having a mix of investment accounts and working on getting you and your spouse’s taxable income/assets more or less equal by your desired retirement age. I know you’re actively working on this Mark and I would encourage other investors to do the same.
I hope this helps your reader and happy to come back to your site Mark as I know you get a lot of reader email.
Thanks Steve. I thought this was great insight from an advice-only planner who has heard or dealt with many an investor email or venting episode on the subject of DSC funds.
It is my personal hope these products will be banned in the coming years but I won’t hold my breath. So, buyer beware in the interim and I wish all readers well in their pursuit of lower-cost investing and wealth building. Subscribe to my site if you haven’t already done so below to stay tuned for more case studies, and much more to help you save, invest and prosper.
A big thanks again to Steve Bridge, a CFP® from Vancouver for his great insights on this subject. Steve works as an advice-only financial planner with Money Coaches Canada (no affiliation with My Own Advisor).
You can find him on this site for his services and/or you can follow him on the Twitter machine like I do at @SteveMoneyCoach.
I hope to have Steve back once again for more investing discussions in the future.
Other reading material that Steve and I have worked on:
Ask the Advisor – Dealing with and getting through financial emergencies
I have a few of questions about how DSC rules apply. If shares of a Series A fund have been owned for 6 years, but that new contributions have been done over time, is there a separate schedule that applies for each contribution, or is it only the time of the initial contribution to the fund that matters?
Also, about the 10% withdrawal allowance without penalty, it is 10% of what exactly? Is it 10% of the number of shares after the last contribution, or is it 10% of the current number of shares, meaning that the allowed number of shares that can be withdrawn without penalty each year decreases over time?
Finally, with the upcoming ban on DSC in mid-2022 for most provinces, what will happen to the existing investment in Series A funds? Will the DSCs for these investments be canceled?
As far as I’m aware Pierre-Luc, DSC funds have their schedule documented in any fund prospectus. Typically, I’ve heard about 7 years needs to pass when any back-end / DSC charges go to zero or close to it but I would need to read the fund prospectus distributed by any fund manager/company to be sure.
I don’t recall of hearing that schedule applying to each contribution period – so the clock shouldn’t start again in year 6 or year 7 if new monies are added but I can’t speak to that accurately. It’s usually tied to how long you’ve held the fund in the first place. Again, all tied to mutual fund prospectus details so I’m speaking very generically here.
DSCs can be 5% or 10% or other if funds are redeemed in the first year and fall gradually every year thereafter. As you may know from that post – the goal is to keep you invested and not redeem. The penalty is tied to % of overall assets owned.
Lastly, not sure what the end game is…we’ll see! Likely not cancelled, just change of fund details about what they do/do not charge investors.
Some interesting reading for you?
All the best.
Thank you Mark, yes I was aware of the schedule in the prosopectus. According to this schedule, the shares mature after 7 years like you mentioned. I have been owning shares of the fund since at least 2014, but my adviser told me that I have DSC for this fund until 2027. I had lump sum contributions to this fund in 2015, then 2016. I also had the dividends reinvested in the fund. The only way for DSC to apply until 2027 would be to have a DSC schedule triggered by the reinvested dividends. Does that make sense?
Thanks for the link, I had come across it already. It does not apply in my case though I think, it is only for new investments.
Interesting…that seems like a very long time (a painful one?) to stay in the fund.
I would ask your advisor to run any numbers regarding leaving the fund. I would also ask them to run a calculation about the fees you are paying during that time period of owning the fund.
It may not be a fun conversation for them but too bad – it’s your money 🙂
You might be able to find your fund in this list?
“How Much Are You Paying?
This is a great, FREE calculator to highlight the terrible damage that high-fund fees do to your portfolio.”
Yes it is rather long. I know that the fund fees are 2.6%, so it is high. Actually it is not my account, but the one of a family member, and the person does not want leave his advisor at this point, so the fees cannot be improved that much, given that all their funds are expensive. We asked for the detailed DSC schedule, so we should be able to figure out what is going on with the dates…
Good work and digging!
When I was “young and dumb” in the mid-1990s, I was sold a bunch of DSC funds by an MFDA advisor who looked me in the face and said “You don’t pay me, the fund companies do.” Hook, line and sinker. Within a year or two I switched to DIY investing, taking my lumps and moving on. Those assets are about 1% of what I have now so it wasn’t a total wipe-out to me, but a very important early life lesson that the only one who I can trust to take care of my money is me. I still keep those statements as a reminder of what liars and charletons are out there. Again, I don’t paint all advisors with a negative brush but I sure experienced one who tainted me forever.
I definitely don’t paint all advisors with the same, negative brush but any advisor these days suggesting DSC funds would be one I would definitely consider running away from fast!
This is a good reminder to check your investments to see if you have a DSC. I’m going to guess that many people who have invested with an “advisor” don’t truly understand what they are invested in or that they even have DSCs.
I think you are spot-on Maria. I would say that almost no one understands that actively-managed mutual funds trail passively-managed funds in performance, or what the compounding effect of the fees they are paying.
It’s not really anyone’s fault, but people don’t even know what questions to ask.
Yes, a good reminder for sure Maria. Hard to distinguish an “advisor” vs. a “salesperson” these days. DSCs are terrible products. I never owned them but trying to get the word out based on what some readers are struggling with. Hopefully they find a way out! 🙂
Happy summer to you and family.
We had DSC funds early on. It made sense to have a disincentive to move your money for a period of time. It was no big deal while the fund was doing well but when I wanted to do more DIY I had to wait or pay the penalty. We waited. So we were paying a 2%+ MER, the fund was not performing as I expected and when I wanted to cut my losses I would pay the DSC. With many new and better financial products available these things should be illegal. Consumer beware and the this whole industry needs a major overhaul, it’s too slow in happening.
Thanks for the article. Keep them coming.
I can see that Gruff, re: disincentive for sure. The challenge is, folks eventually woke up to what > 1% or 2% or even more fees would mean to their portfolios. I know it took me until age 30 to figure that out!
As with any industry, buyer beware!
DSC funds and the lack of a fiduciary standard are two black marks for the credibility of the financial advice industry as far as I’m concerned. These lax standards and fee handcuffs only serve the advisor and not the investor.
The “suitable” standard actually irks me more — CFAs and CIMs are required to operate at a fiduciary standard, which is why robo-advisors operates at a higher standard of care than human advisors. The balance of knowledge between consumers and lawyers, doctors and engineers is why we don’t allow them to work by a suitable standard. Why should advisors be able to do so? I think most Canadians would agree that having their money managed is as important to them as taking care of their health and so on.
Most people reading this blog are DIYers, so we don’t have these burdens but we all know of friends and family members who do.
I couldn’t agree more with your comments. As an advice-only planner, I act to a fiduciary standard, but commission-based salespeople (99.5% of all advisors in Canada) do not. And they still get to call themselves a ‘financial advisor’ or ‘financial planner’, when they do very little actual financial planning. The prevailing model (getting the most AUM) means advisors want more and more people and more and more assets. Guess where that leaves the client?
I strongly encourage people to see a fee-only planner so they know they are getting advice that is in their best interests with no potential conflicts of interest.
DIY investing is great, but investing is only one side of your financial Rubik’s Cube. An investment strategy should be done in conjunction with a complete plan that includes aspects of net worth, cash flow, retirement planning, tax minimization and planning, estate planning, insurance, etc.
Well put Bart. “Most people reading this blog are DIYers, so we don’t have these burdens but we all know of friends and family members who do.”
That said, it is my hope that some non-DIYers see this site as an opportunity to change their ways and in some cases even full-on DIYers might want to take opportunities to work with fee-only advisors and planners every now and then to uncover any major biases leading to their retirement. I probably will.
Thanks for your comments on the site.
Sorry for the double post – it didn’t show up at first and I thought my comment was lost.
I agree with you about the value of fee-only advisors for DIYers. We probably do a fine job as a group in the accumulation phase but the transition to retirement/decumulation comes with so many issues and trade-offs that it is well worth getting a professional plan done well in advance of critical decisions. I’m certainly planning to, just to know I can move forward with confidence.
No problem, somehow got into spam so I wasn’t sure. Doesn’t happen usually…
Anyhow, yes, asset decumulation is very challenging and I’m doing more research on what that means for myself actually now, even before I/we “get there”.
I hope to have a short series on my site about my initial thinking this fall. Stay tuned!
Let me know if you want to connect regarding drawdown/decumulation. This is an area of financial planning that does not get the attention it deserves. It’s extremely relevant for people who are retired or recently retired, but also for those looking ahead to retired. Setting yourself up in your 40s and 50s for optimal drawdown can save a lot of money in tax and give you more for retirement spending (or allow you to retire earlier).
It is also one of the areas where Canadians get some of the WORST advice from their financial advisor. With over 99% of advisors working on commission, it is in their best interests for them to tell you to leave RRIFs to 72, take CPP at 60, etc. People blindly take this advice because they don’t know any different.
I think I could literally base my entire practice around serving this one topic – it’s that important and there is that little information/good advice out there around it.
Ya, I will keep that in mind Steve. See my recent post for some recent thinking. Given my RRSP assets, likely a slow withdrawal/draw down + part-time work should suffice. For me/us, it doesn’t make sense to tap our pensions too early (given early withdrawal penalties) but it does make some sense to potentially delay CPP in particular until age 70. You can gain (as you know) much more fixed income this way. Likely OAS at age 65, not as generous to delay OAS vs. CPP all things being equal.
Lots of thinking still to do but the time is now to start mulling it over before I actually “get there” and need to make a decision 🙂
I have money in some DSC funds as well – thank you for this blog post and thank you 34 dreamford for letting me know about the 10% – I read about that in an article yesterday so its good to read of someone who has done this – will be withdrawing some funds then shortly. Again, Mark and your readers thank you for sharing so much – it helps “newbies” like me trek through the financial wilderness of investing!! So much appreciated!!
Investing does not have to be hard. The most important aspects are:
-Keep your fees low (1% or less)
-Passive investing beats active investing almost every time
-Diversify your portfolio (globally and across sectors). This can be done by buying ONE fund – very easy!
-Don’t look. Investors are their own worst enemies. Think of your investments like a bar of soap – the more you touch them, the smaller they get. 🙂
Some people may bristle at the 1% number I mention, but not everyone is cut out for DIY. At one time, I thought differently, but opening a brokerage account and placing an order is not for everyone. 1% is definitely the most anyone should pay, and is money well-spent for some people.
No problem Amanda, I enjoy writing about these subjects! Essentially DSCs have a “fee schedule” and usually over a period of 7 years that schedule disappears because as Steve has pointed out in the post with me, the “deferred” part of the sales charge simply expires. So, anyone who thinks or knows that they own these slimy products should be confirming how long they’ve held the fund(s) and understand the costs associated with cutting the cord from these products (and likely leaving the mutual fund salesperson too)!
Happy to have your readership and stay well,
DSCs plus the lack of a fiduciary standard (how is “suitable” good enough?) really are a black mark on the ethics/integrity of the current advice model. I’m not at all saying all or even the majority of advisors are unethical or lacking in integrity but the weak standards and things like DSCs and high-fee closet indexing funds really discredit the industry.
I’ve pointed out to numerous colleagues that isn’t it ironic that “robo-advisors” are held to a fiduciary standard whereas human advisors are not. Would we accept this in healthcare, legal services or engineering? Investing is surely equivalent in importance to most people and is just as much a field where there is a clear imbalance of knowledge between the specialists and end consumers – Canadian investors deserve better oversight.
My husband got caught with a DSC fund through RBC Dominion Securities a few years ago. We were just learning about index and dividend investing, had moved, and wished to cash-in and change our investments. He had a significant amount in this fund making the penalty very difficult to swallow. He sought out assistance from an esteemed Globe and Mail columnist who advised that, at that time, you are actually allowed to cash in 10% of the investment in a DSC fund each year without penalty. As he had only 3 of the 7 years left, this is what he did. If this is still allowed, it might be another alternative for your reader to consider. It is unbelievable that Ontario has not yet deemed this type of investment illegal.
Very good point about the redemption schedule over a multi-year period. I would definitely rip the band-aid off though if an investor is in year 5 or 6 but everyone is different and there are penalties to pay that are personal of course.
Unbelievable is right. Can’t really trust our regulatory environment as long as these products are around – can you/we?
Thanks for your comment.
Personally I believe one could do without any funds.
Yes, I know 🙂 But I think those that have not yet had the extreme confidence that you have in a concentrated basket of stocks Henry should strive to diversify their investments. We would agree that high-priced, load-bearing mutual funds are generally speaking very bad for investors but good for those selling those products. I hope they go away.