Q: My 25-year-old daughter just invested $8,000 into mutual funds with deferred sales charges (DSCs) that will apply if she sells them before six years. I believe this is a bad choice for her. Can the advisor switch her into a new crop of DSC funds without her knowledge in six years? Is there a low-cost way to sell these?
—Libor, via email
A: In my opinion, regulators should outlaw DSCs. Although investors are supposed to be told how DSCs work—you’ll face a penalty of up to 6% if you sell them before they mature, usually in six or seven years—people rarely understand their full impact.
Salespeople who use DSC funds argue they’re designed to compensate the advisor for upfront services, such as financial planning. But often there is no useful planning, and advisors often roll over the investments into new DSC funds when the maturity date approaches. That’s unforgivable. But there’s lots of time for your daughter to get on a better track. She should begin by never putting another cent into DSC funds. With such a small amount to invest, she doesn’t need an advisor. A better option is something self-directed but simple, such as the Tangerine Investment Funds, TD’s e-Series funds, or a robo-advisor. As for whether she should pull her original $8,000 out of the DSC funds, I would recommend it. You can usually redeem 10% of the investment each year without paying DSCs, so her best bet is to wait until January and then bite the bullet. She may pay $400 in penalties, but she will make that back by moving to lower-cost funds.
Dan Bortolotti, CFP, CIM, associate portfolio manger with PWL Capital
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