Investment Strategy | Tax Strategy


Deferred Sales Charge Mutual Funds
Photographer: Emily Morter | Source: Unsplash

This week, I heard that, as of November 1, many of Canada’s largest fund managers (the one’s owned by the big 5 banks) will no longer sell their funds using a deferred sales charge (DSC) of any kind. This news saddens me! I know that my perspective is completely out of step with conventional wisdom, and I’d like to explain why I believe that this change is a huge problem for the future of individual investing.


Large investors (who have $500K or more to invest) have a lot of choices for investment advice. Not so for the smaller investor. They have precisely three choices:

  • manage their own funds usually with a subscription to one or more recommendation services,
  • work with an independent agent, or
  • go to their local bank.

There is a certain glamour in managing your own funds – just as there is glamour in playing poker. Statistics show that the results are very similar – most stock market self-managers lose money over the long term. Most people do not have the time or the desire to try to be full-time active investors – especially given the likely results.

What happens when you go to the local bank? You’ll discover two things – your local branch’s advisor cannot offer you the full range of mutual funds available, even from their own organization; and you are unlikely to be allowed to invest in the five-star funds through the branch. One of my friends, trying to buy the TD Dividend fund at a branch, was told that the fund was “closed to you”. This means that the bank does not prioritize him highly enough to allow him to buy that fund, even though he requested it by name.

What you will get are funds and Portfolios designed to under-perform the market. There’s no wonder that small investors are interested in Exchange Traded Funds. Their returns are higher than almost every mutual fund available to the small investor through a branch.

So where do you buy these ETFs? Most people buy them through an on-line discount broker. Who owns these brokers in Canada? The big 5 banks!

The Independent Advisor’s Role

So, the only place the small investor can go to get access to products that have average annual returns in the double digits for decades is to an independent advisor. He or she works for you and doesn’t have to do what the bank’s computer dictates!

How are these advisors paid? By commissions – paid by the fund companies out of the mutual fund’s fees. This is not as bad for the client as has been described in the press and in online discussion boards. Given a chance to invest in a fund with a 50-year record of returning an average of over 15% a year, most small investors don’t care if the fund charges 1, 2, or 15% annual fees, so long as the investor gets their 15%.

Why Should You Care about the Deferred Sales Charge option

The banks have been working to convince the public that the Deferred Sales Charge fees act as a disincentive for selling out of a bad mutual fund. That’s EXACTLY why they were created!

There are two major reasons self-managers lose money on the market. One, they buy high and sell low, basing their decisions on the current direction of the market. Two, they focus on trying to make money NOW. The winners in the market are those people who follow a long-term strategy of buying undervalued assets, then waiting patiently until the market recognizes the value of these assets.

30 years ago, when I started in the industry, there were about 250 funds in Canada. All of them outperformed the market over the long term. However, every fund manager can get caught offside when news breaks, wiping out significant price off stocks they own. The purpose of DSC funds was to provide an impetus for clients to hold on through these downturns, knowing that better days were coming. Owning funds is supposed to be like owning a house – you only care about the price of the fund units when it comes time to sell, but you monitor the price every now and then to stay informed. But, we are told the market performance numbers daily, leading us to think we are supposed to constantly monitor our investments, and driving the current focus on trying to pick the hot stock of the week.

The Current Situation

Today, the average Canadian bank owns close to 2000 funds and portfolios. There are MORE mutual funds in Canada than there are stocks! By design, most of these cannot outperform the market. Almost half of these funds are owned by the banks. Almost none of those funds are sold by independent planners, as those planners know how bad many of these funds are.

So, if you can’t compete, take out the competition. The long term strategy of the banks has been to discredit the means of generating an income for the independent advisor. With no way to earn a reasonable living for 2 to 3 years, most independent advisors would be forced to leave the industry. That would leave the banks as the only option available for small investors!

A proposal to ban Deferred Sales Charge options was widely circulated in the industry, and on the verge of approval. The Ontario government recognized the trap into which we were falling. They told the Ontario Securities Commission not to implement the proposed changes.

The Banks Act on Their Own

In spite of the lack of regulatory approval for their strategy, all the banks have moved to stop the sale of Deferred Sales Charge based funds on their own. The claim is that these funds represent less than 10% of their business. My belief is that these funds represent a significant majority of the investments for average Canadians. They are the ONLY way for a long-term average investor to pay NO FEES on their investments.

Without a regulatory agreement, the big conglomerates have taken an action which is clearly in THEIR best interest. Small Canadian investors have an outcome not suitable for OUR best interests.

Something is fishy about this turn of events! If you agree, please forward this article, and let’s have public opinion force this change to be reversed! You might also consider talking to an independent agent to get your funds transferred from the banks to an independent fund manager. CI, Invesco, Fidelity, Franklin Templeton, and AGF are examples of companies who are still supporting the independent planner by offering Deferred Sales Charge options.

What’s your opinion?

Go to https://cadillacwealthmgmt.com if you want to discuss this issue with me.

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