I came upon something yesterday that made my blood boil.
A new client dropped off his data so we could help him get his financial life in order. Like many, he had lost track of where he was going and found himself in debt and frustrated that he couldn’t get ahead.
As I was reviewing his information I came upon his RRSP statement. I noticed that, like most people we see, he had a collection of mutual funds. Now anyone who knows me knows how I feel about mutual funds – they should be banned!
I’ve been doing this long enough to control my reaction to people owning mutual funds but what set me off was a practice that is so disgusting I can’t believe that it’s legal.
It’s the practice of switching a Deferred Sales Charge (DSC) mutual for another DSC mutual fund after the initial DSC period has expired.
For anyone who doesn’t know about DSC charges, just know that if you move or withdraw your money from a DSC mutual fund during the first 6 or 7 years the fund company charges you (normally) anywhere from 0.5% – 7% of the amount taken, depending on how long the money has been invested in that fund.
The reason DSC mutual funds are sold is to pay the broker an up front commission (usually 5% of the amount deposited).
If you have a DSC mutual fund for say 8 years you probably should be beyond the “DSC” period. At this point, if you were to withdraw your money or move it somewhere else you shouldn’t have to pay any DSC charges. This is normal – in my opinion it’s still ugly, but it is “normal”. What isn’t normal and is outright immoral, is taking the money that is beyond the DSC period and transferring it to a different mutual fund and starting a new 6 or 7 year clock.
The only reason to do this is to line the pockets of the sales person. Never – I repeat never agree to this. As a matter of fact never buy a mutual fund that has a DSC fee attached to it. It’s a trap.
I’ve said for years that there is nothing about a DSC charge that is in the client’s best interest. It’s only there to benefit the brokers and the mutual fund companies.