Is there a low-cost way to sell your DSC mutual funds?

Firstly, ditch the advisor and open a self-directed account

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From the September/October 2016 issue of the magazine.

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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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2 comments on “Is there a low-cost way to sell your DSC mutual funds?

  1. I have to argue with the answer given. First of all every situation is different. DSC’s are meant to reward the investor for holding their money in a fund for a longer period of time. Investing is meant to be long term. To answer the question no there is no low cost way to sell these funds unless your daughter waits the required term and if the advisor rolls over the funds into another DSC without her consent that person could face fines, penalties, of a loss of license. Before pulling the funds ask a few questions. what is the purpose of the investment? how long does she plan on investing this amount for? if she has any financial goals in the near future that she is working towards. Then look at the funds that she is using. What is the average rate of return. It may be better then the robo advisor or self directed.
    Another option may be to wait until January, withdraw 10% without the fee and invest that instead while avoiding the $400 dollar pay penalty. Just because your daughter invested her money in a fund with a DSC that doesn’t mean its a bad thing. She seems to be off to a great start by thinking ahead of most people her age.


  2. What makes this fund a bad investment? Maybe it’s a great fund but it was sold DSC and at that rate is it evil that she holds it for 6 years? If it’s a bad fund try switching to another fund at the same fund company and avoid the DSC charge. There is no guarantee that a lower cost investment at a self directed account will recover the DSC or out perform the original investment. I could make the assumption that without the DSC to discourage withdrawal what’s to say she doesn’t sell out later and blow the money?


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