Be cautious of advisors who abuse Deferred Sales Charges (DSC)
In a recently read an article on Advisor.ca 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:
- A RRSP with Franklin Templeton worth $25,000
- A non-RRSP leverage portfolio worth $55,000 (originally $50,000) invested in AGF mutual funds
- 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.