Deferred Sales Charges and the Mutual Fund Industry
Many clients that come to Pathfinder follow a similar process. We review their current portfolio and break it down to illustrate what they own, how much they are paying in fees and shed light on their returns over a given period of time, before making a proposal of what we would do differently. For clients that owns a basket of mutual funds, the results can sometimes be quite startling, seeing layer upon layer of fees that are associated with the mutual fund industry. One of the most troubling fee structures are called Deferred Sales Charges or DSC’s. We have written about this in the past, and thought it relevant to touch on it again. Recently, we transferred in a number of new accounts that were invested in a large number of mutual funds with DSC fee structures.
A DSC is a commission where the mutual fund company pays the financial advisor an up-front commission (up to 5%) to invest the client’s money into their mutual funds. The client pays no commission out of their pocket except for the ongoing management fee (MER) associated with the mutual fund (usually ranging from 1-3%). However, if the client would like to redeem these funds, they will need to pay back all or part of these commissions. If the advisor was paid 5%, then the client will have to pay back 5% to the mutual fund company in the first year and prorated in subsequent years based on a declining scale of up to 6 years.
At Pathfinder, we have never sold any of our funds with any sort of sales charge paid to an advisor. Our client’s money is theirs. If they want to sell their Pathfinder funds, we can do so end of the month and send them their money with no penalty whatsoever. They just pay a $30 brokerage commission to the custodian where their money is held (Fidelity Clearing Canada, Credential Securities or RBC Investor and Treasury Services). Unfortunately, investors that own these types of mutual fund portfolios are forced to keep their funds to avoid these high redemption fees. We feel this is wrong.
Why are we writing about this? Earlier this year, the Canadian Securities Administration has finally moved to restrict the sale of DSC securities and ban them outright in the rest of Canada by 2022 (excluding Ontario). Please read the full update from our Partners’ at BLG Law here. Many clients have small LIRA accounts sitting at various institutions from old jobs that they just have not bothered to move them, as they don’t want to face stiff penalties. Many long-time readers of our weekly newsletter might be invested in this type of structure.
“This means that” we are encouraging anyone with this type of portfolio to reach out and let us review it. Often, if the DSC schedule is 1-3 years away, it may make sense to bite the bullet, pay the fee, and move on. If it does not and the performance is reasonable, we will tell you to hang on to it. Simply holding on to an equity mutual fund for this reason can have a serious impact if it is a big part of your portfolio and we experience another drop like we did earlier in the year. Please reach out to Nigel Andison at 604-682-7312 ext. 230 if you have any questions or would like us to give you our no obligation opinion on your current holdings.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfinder Real Fund are presented based on the masters series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder North American Equity Portfolio (January 2011), Pathfinder North American High-Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Real Fund (April, 2013), and Pathfinder International Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.