As Larry Bates reminds us with regularity, fees are wealth destroyers. Canadians pay some of the highest fees in the developed world. One money sucking tentacle is the DSC or deferred service charge. The mutual fund company pays the dealership an up-front fee of 5%. That is shared with the salesperson. For selling out of your fund you could pay another 6%. You lose. The mutual fund salesperson wins. There is never a benefit for the Canadian investor. There is no need for DSC mutual funds in Canada.
Yes, you should have a read of Larry’s book – Beat The Bank.
Investment fees – it’s just one massive shipwreck for Canadian investors.
But again, for the mutual fund sales force, what’s not to love?
It is impossible to make a valid argument in defense of these toxic products. But those who profit from DSC mutual funds made a case to the Ontario government and won.
The good news is that on December 19th, 2019, the Canadian Securities Administrators announced that in most provinces, the use of DSCs will be banned in 2020. The Ontario government did not side with its citizens. That’s after much ‘consultation’ with industry types. They forgot to check in with investors.
Previously on this site, investor advocate Ken Kivenko had offered …
My message to OSC and the Ontario government.
The following is my brief letter to the OSC.
Dale Roberts comments on OSC Consultation restricting the sale of DSC mutual funds.
I am writing to express my opinion on proposed OSC Rule 81-502 Restrictions on the Use of the Deferred Sales Charge Option for Mutual Funds (“Ontario’s proposal”). The IAP is an initiative by the Ontario Securities Commission to bring investor perspectives into its policy development and rule making process.
I am a former advisor with Tangerine Investments. As part of my duties I would conduct portfolio reviews of clients’ outside investment portfolios. It was not a pretty sight. I witnessed the destruction of wealth due to high fee mutual fund fees. I saw the effect of deferred sales charges (DSC). That was a weapon in the arsenal of some very unscrupulous advisors. The abuse was a regular event. It’s a great money maker for advisors and their firms.
It was common to see no returns or very low returns for investors over a 10 and 15 year period. They would have been better off in savings accounts.
By way of my investment blog Canadian and Ontario investors continue to reach out to show me how much they are dinged by DSC’s on a regular basis.
Of course, things are so bad it’s a societal issue. Imagine the benefits of investors being treated fairly. Imagine the societal and economic benefits if investors in Ontario had very solid investment returns? They would be better prepared for retirement. They would be less strain on government agencies and benefits.
I am in agreement with the Canadian Securities Administrators (CSA) that deferred sales charges (DSCs) are harmful to investors. Ample evidence supports this conclusion. There is no need for DSC’s. They serve no purpose other than to enrich advisors. These harmful fees need to go away, period. There are no if’s and’s or but’s.
The proposed option that is still harmful for older investors and they’d still be allowed to sell to younger investors? Investors that are even less aware? How could that ever be a reasonable ‘fix’?
Who are you answering to? It’s not the investors in Ontario, that’s for certain.
If a regulatory body was serving the interests of investors in Ontario they would eliminate the DSC. And in fact they’d do much more on the subject of investments and fees.
So, who do you serve? Ontario investors, or the mutual fund establishment?
Chief Disruptor at Cut The Crap Investing.
Instead, here’s the fix. Made in Ontario.
Here are the new rules proposed.
Investment Fund Manager Restrictions
– A maximum term of 3 years for redemption schedule, down from the current 7-year maximum
– 10% annual redemption of units without redemption charge to be cumulative
– Separate series of units for DSCs
– No sales of DSC products to clients aged 60 years and older
– Maximum client account size of $50k
– No sales of DSC products to clients with a time horizon shorter than redemption schedule
– Clients cannot use borrowed money to purchase mutual funds with a DSC option
– Upfront commissions paid only for new contributions to the account
– No up-front commissions on reinvested distributions
– No redemption fees applicable to investor redemptions upon the death of a client, involuntary loss of employment, permanent disability or critical illness
That was from a wonderful post from Ruth Saldanha of Morningstar.
You can’t put lipstick on a pig.
Great, so older investors are spared. But they still have the right to prey upon younger investors trying to get ahead. I could go on, but what’s the point. It’s just a ridiculous proposal. The Ontario government listened to those who sell toxic mutual funds. They ignore the investor abuse. They ignore the Ontario citizen pure and simple.
Stay away from the pigs at the trough.
We know that the regulators do not have your back. I wrote that post just two years ago. It was one of the first posts on Cut The Crap Investing.
I am not one to normally fight the bad guys. I spend my time and energy helping the good gals and guys – the Canadian investor. It’s largely pushing on string trying to get government agencies and regulators to do the right thing by investors.
I prefer the route of investor education. Canadian investors should simply stay away from the investment crap. And that includes most mutual funds. That’s why I started this blog two years ago.
But not all mutual funds are crap. Just most of them. For clarification on that asterisk here’s a great post from our friend Jonanthan Chevreau for MoneySense –
In that post you’ll see mention of Mawer and Steadyhand. They have a permanent spot and mention on this site. Another great mutual fund is the lower fee index-based Tangerine Portfolios. No DSC funds used. A MER of 1.07%. No fees for buying and selling.
Go Robo or self direct.
I also think that most Canadians would be much better off in a Canadian Robo Advisor.
You can get access to very will diversified portfolios with fees in the range of .40% to .60%. There is advice available and financial planning at many of the ‘Robo’ Advisors.
And of course the ‘best’ option is to get up to speed and self direct. You can even purchase those comprehensive one ticket asset allocation portfolios with fees in the range of .20%. All you have to do is enter one ticker symbol.
And when you want more comprehensive financial planning, you might seek out a fee-for-service financial planner. You can pay a flat fee and receive conflict-free advice. You do not have to fork over a significant portion of your wealth building on a weekly basis.
And many in the early wealth building stage do no need advice. You might need simple, effective and cheap investment options, period.
Help yourself. Help others.
Spread the good word on successful, low fee investing. And sure if you want to make some noise reach out to your MPP or MP (and/or finance minister), the OSC or your local regulator. You might add your two cents on DSC mutual funds and investment fees in general.
But mostly what you can do, is stay away from the crap investments. They’re not hard to spot.
Canada’s top-ranked discount brokerage.
For those looking to break away from high fee investing – Cut The Crap Investing readers can sign up with Questrade (Canada’s top-ranked discount brokerage) through this partnership link.
You can buy ETFs for free, including the wonderful one ticket options.
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