A DSC model that works

A DSC model that works

A DSC model that works

There are pockets within the wealth management industry that are utilizing a sales incentive common to many other industries and a potential a saviour for DSCs.

“The more patient your capital is, the longer-term your time horizon is, the better you will do,” David Salem, managing partner of Windhorse Capital Management, recently told the Wall Street Journal. “That may be the only truism of investing, and we’d like everybody to be in that long-term mind-set.”

The Boston-based advisor is talking about customer loyalty and the idea that wealth managers should compensate clients for keeping their assets in the same place over an extended period of time.

Salem’s firm manages the Windhorse Ascent fund which invests in various asset classes on behalf of wealthy clients. Those that stay put for three years pay an annual management fee of 0.8% of assets under management, 0.6% for staying invested for five years and those that stick around for seven years pay just 0.4% or just half what the 3-year client pays.

In other words the client’s rewarded for thinking long-term and for being loyal.

Now imagine this if this sliding scale was applied to the DSC model. The penalties for early redemption would still apply but like the example above, the annual MERs would drop by half over the seven-year schedule meaning if a client held a typical Canadian equity fund charging 2.1 per cent annually he or she would pay just 1 per cent after year seven providing a much bigger incentive for sticking around.

Companies such as Vanguard do this kind of thing through the use of Admiral Class shares. Using a carrot instead of a stick, 36 per cent of Vanguard’s assets today are invested in this class of shares.

DSC funds utilizing the loyalty model could see a renaissance.

“It’s unbelievable” that so few investors have demanded that money managers offer such arrangements, Protégé Partners’ Ted Seides told Jason Zweig. “It’s kind of crazy.”

1 Comments
  • Wealth Advisor 2015-06-15 9:09:37 AM
    Good idea. On paper.

    The general idea is to encourage client retention by offering a loyalty plan.

    From a economic behavioral viewpoint, reducing MERs would not be as effective as receiving an actual cheque in the mail. I could see this system applied to all mutual funds and not just the DSC variant.

    As for DSC funds specifically; in a FE=0% world, DSC funds should be sold like GICs. If you redeem early, the commission is charged back pro-rata.
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