The ‘murkier’ side of mutual funds

“You can invest in DSC funds or in no-load funds. Over seven years, you will pay roughly the same commissions either way but if you leave early, you face a penalty if you choose DSC funds. As a percentage, that penalty declines each year but will still be about $21,000 going into year four. With noload funds, you are free to leave with no penalty.”

The problem with the DSC is that an advisor has a strong vested interest that he is unlikely to disclose explicitly. The investor is needlessly trapped in an advisor relationship for seven years, regardless of fund performance or level of service. DSCs provide the advisor with more incentive to find new clients than to provide a high level of service to existing clients.

In the case of my friend, she has had precious little face time with her advisor after the initial set-up. There were a number of meetings early on but these became infrequent once the loan to buy more funds had been arranged. There was only one meeting in 2012. The most recent meeting, which I attended, took months to arrange and when it finally happened (in March), the advisor showed up late. When we finally sat down, he said he wanted to provide a review of the funds though he didn’t show up with anything on paper and had only a laptop with a 12 inch screen. A half hour into the meeting, he said he’d have to leave soon because he had a plane to catch.

When I tried to gauge if this type of service level, including the loan advice, was normal industry practice, a senior spokesman from Investors Group looked into it and said he was satisfied that the “advisor was diligent and delivered value-added personal financial planning advice as well as providing regular and ongoing client service.”

As for the claim that DSC funds have a lower management expense ratio (MER) than no-load funds, my friend’s average annual MER is still 2.43%, even though she is investing a sizeable amount. For this, she gets investment performance before fees that is about the same as the benchmark indices.

She could instead have put her money into ETFs which would cut her fees by 75% and then work with an advisor on a fee-for-service basis to finetune her asset mix. She would have been ahead by about 180 basis points (1.8%) a year and would have avoided the DSC.

Advisors are important, but you want to be sure their interests are aligned with yours. That is hard to know when you don’t understand their pay structure. My advice is to pay close attention to fees, ask pointed questions and stay away from funds with a DSC.