Saskatchewan fee-only planner Kathy Waite recommends advisors who sell DSC funds also ensure clients have a proper emergency fund in place so that should the unexpected happen their clients won’t be forced to exit those funds avoiding deferred sales charges upwards of 5% or more.
Waite no longer sells products of any kind but when she did there were indeed circumstances where DSC funds made sense for clients.
“I now work as a fee only but prior to 2011 I sold DSC after discussion with my clients. There is absolutely nothing wrong in selling DSC funds to clients if the advisor has done a proper assessment and analysis of the client's specific needs,” Waite commented on WP. “And has made the client aware of exit fees and they have an emergency fund so they do not cash in.”
There’s only one problem.
A 2014 CIBC poll from Harris/Decima found that 45 per cent of Canadians don’t even have an emergency fund. So, by backstopping DSC funds with an emergency fund, advisors are actually helping their clients times two.
“It’s actually a form of self defense. The last thing you want is a complaint. Clients have very selective memories so even if you told them that there’s an exit fee on the fund and asked them are you sure it’s long term? You know, life happens and then they come looking for it,” Waite told WP. “Of course it’s always when the market’s down; it’s never when it’s up. And it’s usually registered so they lose 20% or something in withholding tax and then you’ve got a 5% DSC and the market is down and they send in a complaint. So, that is why I always did that [set up an emergency fund with DSC] as a best practice.”
Another problem beyond DSC exit fees is the very concept of emergency funds. Most people get confused about what actually constitutes an emergency.
For that reason she has a two-tiered system where the client sets up a “life happens fund” for those times where things such as your side mirror getting knocked off your car in the grocery store parking lot. For actual emergencies such as losing your job and income for six months she gets them to keep room on their lines of credit combined with some sort of GIC laddering.
And lastly, regardless of fund fees, Waite has an important piece of advice for clients of all types.
“I always say to people if you need the funds in the next 3-5 years, don’t put it in the stock market,” she said.