The most ‘noble’ reason to sell DSCs

The most ‘noble’ reason to sell DSCs

The most ‘noble’ reason to sell DSCs Professors from Harvard, Yale, Cambridge and the University of Chicago have just brought out a paper that shows the best way to solve the savings dilemma is to limit a client’s ability to withdraw funds from their retirement accounts.

Say what you will about DSC funds but ultimately the sliding-scale withdrawal charges are higher in the first two or three years to ensure a client keeps their funds invested with a fund company over the long haul. It’s a disincentive to move their money.

The six professors’ findings suggest the idea of limiting choice could actually be a good thing for clients, and by extension, advisors.

“This paper studies the demand for commitment devices [such as DSC early withdrawal] in the form of illiquid financial accounts,” state authors of the academic research paper Self Control and Commitment: “When the commitment account and the liquid account have the same interest rate, commitment account allocations are increasing based on the commitment account’s degree of illiquidity.”
 
Translation, please!
 
Essentially, when there is a serious disincentive for a client to move money from one savings account (DSC) to another as a result of a tax or withdrawal penalty, the study has found that clients are far more likely to remain invested in the savings product in question.
 
The authors also point out that U.S. retirement vehicles such as the 401(k) and IRA provide only minimal disincentive to pull money from the account – a 10% tax penalty for funds withdrawn before age 59.5 -- but that the level of commitment would increase with a higher penalty not unlike those of DSCs.
 
“Among participants offered only one liquid account and one commitment account, those whose commitment account has an early withdrawal penalty equal to 10% of the withdrawal allocate less to it than those whose commitment account has a 20% early withdrawal penalty,” write the researchers. In turn, those investors allocate less than those whose commitment account completely prohibits early withdrawals.”
 
So, by making the DSC withdrawal charges as high as possible, combined with the tax consequences of a client withdrawing funds from an RRSP, the authors maintain that the disincentives for doing so, help, not hinder, a client’s ability to save.
6 Comments
  • Kevin O'Brien 2015-09-02 10:06:36 AM
    I read recently that the regulators in England have commissioned a study to find out why their working population has little to no money in regards to savings or investments. Perhaps the banning of commissions had something to do with that? Just goes to show how government regulation intended to come down hard on advisor's has an unintended consequence. Many advisor's left the industry and now the government realizes that these advisor's did indeed provide value to their clients - sadly after the fact. Time will tell if Canada has learned by others lessons.
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  • Tony Romano 2015-09-02 11:14:13 AM
    I think that there just has to be a balance. I think if the time frame is reduced to 4 or 5 years from 7 or longer, DSC funds DO make clients commit. I think any advisor needs at least that long to see the financial plan starting to come to fruition. Anything less and a client shouldn't be invested in anything but a GIC, in my opinion.
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  • Will Ashworth 2015-09-02 2:51:20 PM
    Kevin.
    The UK government spent $3.5 billion Implementing RDR and it's not over by a long shot. Story coming on that. Very interesting indeed.
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