Be cautious of advisors who abuse Deferred Sales Charges (DSC)

In a recently read an article on on the problems of the Deferred Sales Charges (DSC). There may have been a time and a place early in the birth of the mutual fund industry where DSC structures made some sense but in today’s world, everyone would be much better off without the old back end load. If you are not sure what a DSC or back end load is, read this article on mutual fund fees.

A tale of bad, selfish advice

A young couple, Janet and Reg, recently asked me for a second opinion on some advice from their financial advisor. We’ll call him Mr. Advisor.

Janet and Reg started working with Mr. Advisor 6 years ago. Since the beginning of this relationship, he has moved companies twice and now is embarking on his third move in 6 years. He started with World Financial Group and then moved to another mutual fund dealer and now is moving to an insurance based license.

Janet and Reg have 3 investment accounts:

  1. A RRSP with Franklin Templeton worth $25,000
  2. A non-RRSP leverage portfolio worth $55,000 (originally $50,000) invested in AGF mutual funds
  3. A non-RRSP mutual fund at Franklin Templeton worth $25,000

Mr. Advisor wants them to cash everything out of mutual funds an move it into a Guaranteed Minimum Withdrawal Benefit (GMWB) Segregated Fund with Sun Life using their SunWise Funds. There are so many things about this recommendation that bugs me that I feel compelled to write about it so that anyone getting this type of advice runs away from their advisor as fast as possible.

Why should they pay back end loads when he is recommending them to get out?

Firstly, to get out of these funds, the young couple has to pay over $2500 in back end penalties which the advisor has recommended they pay. What is the benefit to Janet and Reg for paying this fee? For Janet and Reg, there is little to no upside. They get investments with higher fees (1.14% MER for Money market up to a whopping 4.13% MER), they get guarantees that are going to be irrelevant to them in the long term and their chances of performing better are not higher but arguably lower. And when they buy the new investment they will be locked into a new 6 year DSC schedule.

So what’s in it for the advisor? Lot’s! How about a $4200 commission cheque for selling the new Sun Life investments. And let’s not forget about the $4000 he already made from the sale of the Templeton and AGF mutual funds. And let’s not forget about the $2000 in trailer fees he already made over the past 6 years. So who’s helping who here?

And there’s more . . .

So when I asked Janet and Reg about why the advisor is changing firms, Mr Advisor told them it was because the fees and costs of the mutual fund industry was too high. Having been a licensed mutual fund advisor in the past, let me translate . . .Mr. Advisor is now recommending segregated funds because he is giving up his mutual funds license because he can’t make enough money to justify the costs of being an advisor who sells mutual funds. That sounds like a really successful advisor!

Everything about this story sucks and my advice to the young couple was very simple – get a new advisor. There are lots of advisors who can afford to deal with mutual funds and don’t sell funds on a DSC or back end load basis. This story is an extreme example of the conflict of interest that occurs in the financial industry – are advisors recommending products because it’s best for the client or because it’s best for their personal interest? The good news, is not all advisors are this extreme in recommending products based primarily on their own selfish reasons. Unfortunately, this story also proves these advisors still exist. Remember, not all advisors are created equal. For that reason, my hope is that all of Mr. Advisor’s existing clients read this article before they sign on the dotted line to help him earn more commissions for really bad selfish recommendations.

My bigger hope is any investors who recognize that this situation (triggering back end loads to trigger new upfront commissions without re-imbursement) may have happened to them take a stand and let their advisors know this is wrong and not ethical. For new investors, make sure you know what fees are being charged, especially Deferred Sales Charges (DSC) and back end loads.


  1. larry elford

    good article, good advice

    (just need to get people to start looking up the actual license category of their so called “advisor” and begin to stop calling them by their preferred marketing name, but by their actual license (which was “salesperson” prior to sept 2009, and is now “dealing representative”

    see other tricks of the trade by salespeople at
    Larry Elford, former CFP, CIM, FCSI, Associate Portfolio Manager, retired

  2. Larry Elford
    Crime pays

    “Losing billions to “respected” fraudsters, while they get an “assist” from government, and a free pass from the police…….”

    How we lose billions to “respected” financial fraudsters, how they get help from your government to fleece you, and police give them a free pass at the highest levels. A system mechanic view. A Canadian insider view.

    By now it is well known that our financial servants have become financial predators, in too many cases. What is not as well known is how your government servants are also in the game. The game is to sell out or remove protections for the public, so that corporations can earn greater profits Sometimes by doing illegal things. (imagine if this were done in oil, fracking, forestry, and finance, etc., etc?) Here is how this sellout is done to your investments in Canada, to skim about one billion dollars a week for just this one industry. Your investments at risk by people hired and paid to protect you……….30 minutes. Enjoy, and contact the speaker if you have an interest in legal challenges to servants who prey upon the public.

  3. Larry Elford

    How to take one billion dollars of public money and “convert” it into private (banker) hands. It happens every day to your tax dollars, your investment dollars, your retirement. All your money is a free target when this aspect of government/banker corruption is allowed in your province. And it IS allowed.

    3 minute video with documents and examples
    See the special laws for the rich, that allow them to take money from the rest.

  4. Patrick Keith

    In our haste to trash financial advisors let’s not forget the PricewaterhouseCoopers study that cites studies done over a 15 to 20 year period showing that those working WITHOUT an Advisor accumulated LESS THAN HALF those working WITH an Advisor.

    To be sure one wants to work with a GOOD Advisor.

    But as Duff Young once pointed out a GOOD Advisor is worth at least three or four times what they get paid.

    The test of a good advisor in my experience is (a) whether he is knowledgeable, (b) whether he will put your needs first and (c) how he behaves when things do not go his/you way (a good advisor will work through that and turn it around – a bad one will argue for the status quo long past time to move because that is all they know.

    In my experience good Advisors are SIGNIFICANTLY underpaid and the client benefits to a much greater extent than the Advisor ever will – hence Duff Young’s Comment.

    But they are easy targets and people love to trash them which is in the vast majority of cases completely unjustified. For example that case probably never happened or is significantly distorted.

    On the other hand people do need to be aware of some of the pitfalls.

Leave a reply

Your email address will not be published. Required fields are marked*