The CSA recently put in place a ban on Deferred Sales Charge mutual funds. Ontario decided to not go along with the plan. The regulatory environment can be more than complicated. Given that, I asked investor advocate Ken Kivenko to provide a concise update on the Deferred Service Charge ban in Canada and Ontario. Take it away Ken …
The problems with Deferred Sales Charge (DSC) mutual funds were identified by investor advocates over 20 years ago. Such funds pay the dealer a healthy 5% commission upon sale of the fund. Upfront sales commissions create conflicts-of- interest and impose liquidity constraints that harm investors.
Not in your best interests.
This compensation bias provides an incentive for dealers to recommend a product that may not be in the best interest of investors and has led to sub-optimal investor outcomes. There were cases of such funds being sold to seniors and people with time horizons less than the redemption schedule. In a number of cases, the funds were redeemed when the redemption schedule expired and new funds were purchased with another 5% commission paid to the dealer.
Churning adversely impacts investor returns.
In December of last year all Canadian provinces and territories, except Ontario, finally decided to ban this toxic product. That ban will only take effect on June 1, 2022 in order to give dealers time to transition away from sales of such funds. During the transition period leading up to June 1, 2022, dealers will still be able to sell DSC funds and their redemption schedules will run to their conclusion meaning that toxic 6 year Deferred Sales Charge funds will be in client accounts in Ontario until 2028!
The made in Ontario plan.
This month the Ontario Securities Commission (OSC) released its plan to control sale of the DSC Fund.
The proposed rule would prohibit the sale of mutual funds with the DSC option to clients who are aged 60 and over, or who have an investment time horizon that is shorter than the DSC schedule. The rule would also prohibit sales to clients who intend to use borrowed money to finance their purchase and would impose a $50,000 threshold for maximum account size. The OSC rule would shorten the maximum term of the DSC schedule to three years, compared to current industry practice where the maximum term can be up to seven years. Additionally, clients would be able to redeem 10 percent of the value of their investment without redemption fees annually, on a cumulative basis (currently, it’s annual with no carryover).
The get out of jail ‘free’ cards.
In financial hardship circumstances, such as involuntary loss of full-time employment, permanent disability and critical illness, clients could redeem their investments without paying redemption fees. The proposed rule also proposes restrictions to prevent other investors in a fund from cross-subsidizing costs attributable to DSC investors, and to prevent dealers from collecting multiple upfront commissions on the same source of funds. This should reduce the MER of other series of funds to the benefit of investors.
If approved, Ontario investors should be relatively well immunized against fund salespersons addicted to high sales commissions. Unfortunately, investors of modest means based in Ontario could still have their life savings impaired by fund salespersons promoting Deferred Sales Charge mutual funds as they will be the primary target.
Ontarians may be targeted.
All in all, investors will be better off but the glacial speed of regulatory reform in Canada is a systemic issue which our elected representatives should be addressing.
Dale note: thanks so much to Ken Kivenko who works tirelessly on behalf of Canadian investors. It truly is a shame that certain industry types defend the use of high fees and advice that can be riddled with conflict.
And yet, here’s the CEO of Primerica defending the actions in Ontario. And the CEO, John A Adams, is defending the use of DSC funds as a tool that serves investors. Where’s that crying emoji when you need him?
Here’s the link to that article in defense of DSC charges.
Ken knows what goes on out there. So do I. When I was an advisor at Tangerine Investments I had the role of performing portfolio analysis for clients’ outside investments. I often saw the results of DSC and fund switching for the benefit of the advisor. Too often I witnessed Canadians with no returns or returns that would lag savings accounts over longer periods. The money simply ended up in the wrong pockets.
Keep the money in your pocket.
While not all mutual funds are evil, keep in mind that most are. Be careful out there. Here’s Jonathan Chevreau on MoneySense with the best mutual fund companies you’ve never heard of. You’ll find Mawer and Steadyhand and Tangerine with a permanent place on Cut The Crap Investing.
There are a few good shops. But mostly, investing in mutual funds leads to a bad experience. Other than a few exceptions you want to avoid them. Canadians these days ARE making better investment decisions. Over the last 2 years low-cost ETFs have outsold high fee mutual funds by a wide margin.
For 2018 and 2019.
- ETFs – $43.2 billion
- Mutual funds – $13.9 billion
With ETFs you get access to the same assets at a fraction of the cost. A comprehensive one ticket asset allocation ETF portfolio is about one-tenth the cost of mutual funds. You might build your own ETF Portfolio.
If you want advice and managed ETF portfolios you can research the Canadian ‘Robo’ Advisors. They offer a mix of human and digital advice.
You may also seek out an advice-only planner for conflict-free financial planning.
Thanks for reading. Please help your fellow Canadians and share this message. And don’t forget to sign up to follow this blog. Low fee investing is here.
Dale, for Ken.