If you advise your clients to invest in a deferred sales charge mutual fund, you could be restricting their movement at a time of increasing market uncertainty.
We’ve all heard investors bemoan the much hated DSC: a fund with an up-front commission that pays up to 6 per cent on the initial investment, plus a trailing commission of 0.25 to 0.5 percent per annum.
For one, DSC funds spike investment management fees and challenge the ability of advisors to recover a profit for their investors. Then there are clients’ underlying suspicions that advisors may not practice due diligence over the long term since their bread is being buttered up front.
But with growing fear that we are finally near the end of the bull market, some advisors are pointing to a new reason to be leery of DSC funds; specifically, the undue influence they can have on investment advice.
Martin Danielak, Associate Investment Advisor and Portfolio Analyst at Friesen Capital Management, believes that DSC funds ultimately make it more difficult for an advisor to manage a client’s investments.
“Unfortunately," he offers, "advisors are sometimes handcuffed to a DSC fund because of high up-front fees, which often influences clients to hold investments longer than optimal even if it is against the advisor's direction to sell due to changing market conditions ."
Market cycles happen on a six year basis, and most advisors will agree that not all funds are suitable to hold forever.
Danielak believes that commission-based advisors have more to gain with low load funds, where they’ll make up to 1 percent per annum, instead of 0.5 percent in the case of DSC funds.