Recently I wrote about one investor who was tired of paying higher management fees on her DSC mutual funds. When she wanted to pull her money out, she was faced with a back end load also known as a deferred sales charge (DSC). She wanted to know if it made sense to pay the DSC?
Do it yourself investing?
In the example from my last article, Ellen wanted to move from advisor recommended mutual funds to a do-it-yourself version through the TD e-series.
Related article: Financial advisor or do it yourself
The challenge for many investors is they won’t, can’t or shouldn’t do it themselves. I’ve told many investors that we live in a time where investors have the tools and information to invest their own money if they choose but they have to have the time, passion, knowledge and desire to do it themselves. Not everyone has these qualities, which means that many investors will have to get help from financial advisors.
Should financial advisors get paid?
The economic reality is that good financial advisors deserve to get paid. It’s similar to the fact that I could build my own deck. There’s information and tools out there for me to do this but I have to want to do it and I have to feel confident that I can do it. If I hire someone to do it for me, I have to expect that I will pay more than trying to do it myself.
Related article: How to financial advisors get paid?
Moving to another advisor?
I recently talked to another investor who was not happy with one of his investments and advisors. Let’s meet Carl. Carl was not like Ellen in that he was not interested in investing himself. The idea of investing his own money is interesting but he does not have the confidence that he can invest properly. As a result, Carl wants to consolidate his money by moving money from one advisor to another? DSC mutual funds can still create significant problems.
Carl has $18,994 in the Primerica Aggressive Growth Fund with his Primerica agent. He is not happy with this advisor and wants to move this money to his other financial advisor that has money invested in the Dynamic Power Cdn Growth.
The problem is to get out of the Primerica mutual fund, he would have to pay $797.54 which is the equivalent of a 4.21% penalty.
After reading my last article on Ellen, Carl was wondering if it made sense to pay $797.54 to move from the Primerica Fund which has a MER of 2.72% while the Dynamic Fund MER was lower at 2.42%.
Related article: Management Expense Ratios do matter
Should he pay the DSC?
On an $18,994 investment, the annual fee savings would only be $56.83 (2.72% minus 2.42% times $18,994). The math suggests that it would take 14 years to make back the $797.54 back end load.
In my humble opinion, that’s not enough of a fee savings to justify the one time cost. It’s just too big of a penalty. In other words, it’s too long to breakeven.
Not an apples-to-apples comparison
The Primerica fund is a global equity, while the Dynamic fund is a Canadian Equity. Although I do think the Primerica MER is too high, global funds will typically have a higher MER than Canadian Equity funds.
Carl can switch to a different fund at Primerica but he is not happy with the advisor. One of the challenges that Carl faces is that the Primerica Advisor is a proprietary advisor that only sells Primerica Funds. He can’t even move the money to his other advisor for this reason.
Any way you look at it, DSC mutual funds are not great! The investment industry has evolved and investors should avoid DSC mutual funds whenever possible. There are many advisors willing to invest on a no-load basis. The bottom line is don’t buy DSC mutual funds if you don’t have to!