De Goey says, “no person would consent to be given bad advice.… Similarly, no one would consent to being sold an inferior product if they knew better products (or better variations of identical products) existed.” He says not all funds that pay trailers use DSCs; 90% of embedded A-class funds are sold with front loads of 0%, plus a 1% trailer for advisors, while 9% are A-class funds that pay both the 5% upfront commission and impose a DSC, plus pay advisors a 0.5% annual trailer. “It’s the same fund and the same MER.” F-class is only 1% of the market by assets; while those funds back out the 1% trailer, the advisor tacks on a mutually agreed-upon additional fee. And if the advisor is in demand, that fee could be and often is even higher than 1%.
Salman Ahmed, a portfolio manager with Steadyhand Investment Funds, notes that while F-class improves on the problems of conflicts of interest and transparency, it doesn’t address the problem of high costs or return-chasing. F-class fees are usually equal to the fees of A-class minus the trailer—but keep in mind that the F-class investor still has to pay the advisor now that there is no trailer in the fund, so the overall cost difference is minimal. In fact, Ahmed adds, many fee-based accounts often charge clients more than 1% for advice on top of fees for F-class funds.
Few sources outside the IFIC defend DSCs, so there should not be much mourning their passing outside Ontario. Even respected fund analyst Dan Hallett, a principal at Oakville-based Highview Financial Group, wrote in Investment Executive last March that “DSCs should be banned.” In December, he told one newspaper that Ontario was being arrogant and applauded the other CSA members for “moving forward with the right decision.”
Ken Kivenko, president and CEO of Toronto-based Kenmar Associates, says 85-year-olds are often sold DSC mutual funds that lock them in for seven years. “Often these are sick people and the advisors who sold them likely knew they had no emergency fund.” Encouragingly, the same day as the CSA’s ban outside Ontario was announced, the Ontario Securities Commission said it was considering several “alternative approaches” to DSCs, including banning their sale to seniors, prohibiting borrowing to buy DSC funds, and providing “hardship exceptions” from redemption penalties.
Michael J. Wiener, the blogger behind Michael James on Money, “can’t think of any context where DSC is defensible.” Mark Seed, who runs the MyOwnAdvisor.ca blog, encourages investors still in DSC funds to learn the penalties to transition out of them. If the schedule has several years to run, “consider ripping off the Band-Aid now and divesting of them sooner rather than later…and good riddance.”
Cut the Crap Investing blogger and former advisor Dale Roberts says DSCs no longer serve a purpose: “It only serves advisors and mutual fund managers. Advisors don’t need DSCs to run their operations profitably. They’re doing more than fine with the typical wealth-destroying 1% annual trailing commissions that are usually attached to equity funds.”
The mutual fund market “has evolved”
While regulators in Australia and the United Kingdom banned trailer commissions a decade ago (as has New Zealand) hopes that Canada might follow suit were initially dashed last year. In September 2018, Ontario first rejected the CSA’s proposal of June 2018 to ban DSC-sold mutual funds altogether. The CSA has it right, while “Ontario got it wrong,” says fee-for-service financial planner Robb Engen, the blogger behind Boomer & Echo.
But even if Ontario fails to follow suit any time soon, the industry itself may ultimately do the job. As Engen notes, “the writing was on the wall that DSC funds are on the way out when Investors Group decided to discontinue selling DSC funds three years ago. At the time their president said ‘DSC was created to provide discipline to long term investing but the marketplace has evolved’.”