Five reasons why all advisors should love DSC funds
Apparently nothing gets advisors going like a debate on the merits of DSC funds or the lack thereof. But here are five inadvertent benefits to DSC funds that not even their most-ardent opponents can deny.
They prevent panic selling
Case in point, one particular advisor preferring to remain anonymous acquired another advisor’s book back in 2008 just as the markets were imploding. A client demanded that their DSC funds be sold to avoid more losses. When informed of the penalties to sell the funds before the end of the seven-year DSC schedule, the client changed their mind. Since then their portfolio has almost tripled.
Keep discretionary spending in check
We’re talking about big purchases such as cars or vacation properties and of course made from funds in TFSAs and investment accounts. By attaching a steep penalty to redemptions within the first two years (generally 5.5 per cent) there is a disincentive to cash out for even the most spendthrift of clients. With an average car price of $36K, if a client uses DSC funds to pay for said car, the penalty is approximately $1,650 if the equivalent amount is sold to pay for the car.
Cancel out excessive front-end loads
The DSC came into being because clients were unhappy paying 9 per cent in upfront fees to own mutual funds. Intended to be a win/win where the client pays nothing upfront putting 100 per cent of their investable assets to work while ensuring that their advisor got paid for the initial hard graft of constructing a portfolio. Speaking to DSC supporters, it’s clear clients are much happier with this arrangement.
Require less handholding
While opponents of DSCs tend to consider these funds a “jail sentence” for clients, the built-in buy-and-hold aspect of this fee structure puts clients more at ease because, if properly explained, the advisor is less likely to have to talk the client off the ledge in volatile markets. If you know you have a seven-year hold, history has shown that markets always recover over the long term. The 2008 correction is proof positive.
Now how do you feel about No. 5?
Says goodbye churning
Usually there isn’t a fee to switch from one DSC fund to another within the same company. An exception being when a client switches accounts (eg. investment account to RRSP account); a negotiated switch fee may apply. But with no additional fees to be had, it’s less likely for an advisor to churn an account but still be able to move the client into more appropriate investment options.