Deferred service charges, or DSCs, are thankfully starting to fade away. DSCs are charges that mutual funds have been using since 1987. The basic premise is that in exchange for a no-load fee fund (you should avoid these load fee funds as well) a mutual fund would lock you up for up to 7 years. If you redeemed the fund early, you would be subject to withdrawal fees, some even up to 8% of the value of your investment! As you held the fund, the amount of the DSC would decline over time, perhaps by 0.50% per year. The idea behind these funds was to encourage long term investing, which is a good idea, in practice. However, in reality what it mostly did was lock investors into poorly performing and expensive funds for years while they waited for the DSC to expire.
A big reason for the decrease in DSC’s? CRM2, or Client Relationship Model 2. This is the improvement of reporting standards across the investment industry in Canada by the securities regulators. CRM2 has required investment managers to disclose their fees in a more transparent manner, and this increased transparency has left a lot of firms caught with their hands in the proverbial cookie jars. Low cost index funds and greater public awareness of fees has pushed many in the industry to make changes. Take Investors Group for example, which is banning the sale of Mutual Funds with DSC’s effective January 1, 2017. While this is long overdue, we commend Investors Group for taking the lead in the mutual fund industry.
We here at AFT Trivest have long railed against these antiquated and wealth-damaging fees for years, so we are more than pleased to see this development.