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Wealth Professional | 15 May 2015, 09:30 AM Agree 0
Hold your fire: Here are five inadvertent benefits to DSC funds that not even their most passionate opponents can deny.
  • Scott Blair | 15 May 2015, 09:49 AM Agree 0
    DSCs should be illegal. If they didn't exist and were going to be introduced today there is no way any regulator would allow them. It would sound like this:

    I have NEVER, EVER had a new client transfer in and when asked the question "Do you know what DSC means?" Ever had the client say yes. Further when explained they are ALWAYS thoroughly irritated.
  • Marcelo Millar | 15 May 2015, 10:00 AM Agree 0
    At Investors Group, DSC funds also have a lower MER vs. the exact same fund on the No Load option. That is the client benefit to buy a DSC fund.
  • John Kehoe | 15 May 2015, 10:28 AM Agree 0
    DSCs do not prevent panic selling. Every fund company has money market and/or bond funds to which assets can be switched without penalty. Also, just as they ignore the pitfalls of locking in losses, investors in a panic will tend not to consider the DSC expense.

    The underlying issue driving much of the debate on DSCs and other mutual fund expenses is not the charges themselves, but rather the lack of disclosure and, especially, the general lack of professional-level advice offered by many advisors who derive their compensation therefrom.
  • BC Advisor | 15 May 2015, 11:18 AM Agree 0
    I'm sorry but if your clients are panic selling you are putting them into funds that are beyond their risk range. Discretionary spending, really? It's a called a budget. Who charges 9% front end ever? I guess if you say you'd charge a 9% front end, a 5% back end sounds SOOO much better, I'm shocked an "advisor", more like mutual or seg fund salesperson, would resort to these tactics. "Gee look at the deal I'm going to give you" Volatile markets, they are beyond their risk tolerance, nice try.
  • Michael Gentile | 15 May 2015, 11:28 AM Agree 0
    Who charges 9% ?? These are all very valid points. The DSC versus FE scenarios also need to take into consideration short term liquidity for non registered assets as well as long term horizons for registered assets and the demographic of the investor.
  • Will Ashworth | 15 May 2015, 11:33 AM Agree 0
    BC Advisor.
    The section on FELs was simply referencing the history of DSCs and why they were created. There is no mention of advisors charging 9% today. In fact, the max you can charge on FELs is less than that at 6%.
  • Will Ashworth | 15 May 2015, 11:39 AM Agree 0
    Michael Gentile,
    See my point addressed to BC Advisor.
  • Will Ashworth | 15 May 2015, 11:43 AM Agree 0
    John Kehoe,
    You make some very good counter arguments to the panic selling section.
  • Will Ashworth | 15 May 2015, 11:50 AM Agree 0
    Scott, you should read the article below if you're anti--DSC.
  • Vancouver IA | 15 May 2015, 12:08 PM Agree 0
    This is clearly written from a very "pro" DSC standpoint, probably from someone who likes/liked to use a lot of DSC's when they were an advisor. Each one of these claims is very easily shot down with even the most elementry understanding of portfolio management. Perhaps the most glaring is the second point of "avoiding the large front end load". How about selling the fund NO LOAD, seems to be a much better option. Why have you made it seem like there are only the two options of massive front end or slightly less massive back end. No doubt used as a tactic with clients to get them to agree to the DSC. Im sure most clients, sat down and explained the fee structure would not take a DSC locked in fund over the no load, pay as you go option. Also they don't prevent panic selling at all, as stated by other people they can just switch to money market. "Say goodbye to churning". I have seen dozens of clients previous portfolios filled with DSC funds with former advisors churning the book every couple of years. This article is very dissapointing and one sided.
  • Ross Birney | 15 May 2015, 12:38 PM Agree 0
    These are the same old tired arguments we hear over and over again. None of them are valid, none stand up to scrutiny and none hold the client's best interests first.

    Prevent Panic Selling - I also had clients in the 2008/2009 decline, and the '98 decline, and the '00/01 tech bubble and in 2011 and through many other market declines. You educate clients into taking the appropriate actions, not lock them into a structure which only exacerbates a bad situation. "Give a man a fish and you feed him for a day, teach him how to fish and you feed him for a lifetime."

    Keep Discretionary Spending in Check - So, if I charge a high enough fee or penalty the client won't have any money left over for what they would otherwise spend it on. Is that truly the best argument DSC advocates can come up with? What about medical emergencies, being laid off, or life simply not working out as planned? And what about respecting the client by acknowledging that it is their money (not the salesperson's) and allowing them the freedom to spend it as they wish.

    Cancel out excessive front-end loads - Ludicrous. The 9% front-end fees were eliminated many years ago when the DSC structure came into being. Today, front-end loads are limited to 1%-2% by most firms and many of us charge 0% front-end load. I don't see the argument that 0% is excessive.

    Require less handholding - This is simply a variation of the first point, and just as nonsensical.

    Says goodbye to churning - Sadly, I have seen far too many cases where salespersons took the 10% annual free allotment from a DSC fund and placed it in another fund on a DSC basis just to earn another up-front commission. Salespersons who are prone to churning a client's account will do so regardless of the fee structure.

    If a client's best interests are truly considered first, not a salesperson's fictitious sense of "entitlement" to charge fees, and the advisor treats his client in a fiduciary manner, then all arguments in favour of DSC fees fail.
  • Will Ashworth | 15 May 2015, 02:13 PM Agree 0
    Vancouver IA,
    Please see this story for the anti-DSC side.
    We're trying to cover both sides of the argument and expand the discussion beyond who's right.
    Thanks for commenting.
  • Kevin O'Brien | 15 May 2015, 02:27 PM Agree 0
    Sorry- from the discussion going on I feel (this is my opinion only) that you may have missed the real intention of CRMII and the discussion about banning commissions and the negatives about DSC. If you are "selling funds" you are history in this business. You should be focusing on honing your financial planning skills and not your sales skills. I see a future whereby the suppliers of funds will deal directly with the public and financial planers will be paid for doing financial planning - either on a fee for service, hourly rate or a fee based on AUM but as for commissions they will be gone gone gone. Forget the slick sales and concept sells - it will boil down to cash flow management - building a clients net worth, providing asset allocation services, estate, tax and retirement advice....only.
  • Will Ashworth | 15 May 2015, 02:35 PM Agree 0
    Nice comments. One of these days I hope to speak with you. Hard guy to get a hold of.
    Tuesday we have an article running that addresses your thoughts.
    Thanks for your insight.
  • robert | 15 May 2015, 03:34 PM Agree 0
    A couple of comments. Panic selling usually comes as a result of not understanding the issues at hand and not ne3cesarily being in the wrong investments. The media with their salacious headlines can make the most seasoned investor cringe. Our job is to simplify and clarify the issues at hand and in turn insure that our clients will not make decisions based on their emotions. The Chinese have a proverb that Crisis=Opportunity. Down markets are a welcome to those who understand the opportunity t further their wealth during these times.
  • Will Ashworth | 15 May 2015, 03:46 PM Agree 0
    Your comments do a good job explaining why the "human" advisor remains an important part of the wealth management industry. WP exists because of professional's like yourself.
    Thanks for the comments.
  • Michael Gentile | 15 May 2015, 04:22 PM Agree 0
    Your DSC article seems to have hit a nerve. I am curious to know what is considered to be a reasonable fee for service from those of you that are charging fees ? Unless you have been living in a cave for the last 100 years you have to know that there is a cost to providing quality service and advice. I am sure that my staff would appreciate me telling them that I am not going to pay them as would my land lord. I can tell you there are significant costs associated with running this type of business today and I share that information with my clients. In conclusion if you can find a way to significantly reduce those costs for me I would be happy to pass on the savings to my clients. We invest considerable time effort and research into finding the products that best suit the needs of our valued clients. We do not take a cookie cutter approach. Maybe we are different maybe we are not . We get thank you notes and that tells me that we are doing what our clients want.
  • Ken kivenko | 16 May 2015, 01:05 AM Agree 0
    The mfda suitability guide lays down some tough criteria to justify a DSC fund.In our experience we have never found a DSC to benefit anyone other than the dealer/Rep.The DSC must be paid even even if one wishes to exit because of dismal performance, a sudden need for cash or a fee increase.We have seen DSC funds sold to the elderly , many not outliving the 6-7 hold period.Professional advisers do not sell DSC funds.They are a relic from the ugly past and it is time for them to be buried.
  • John Kehoe | 17 May 2015, 04:21 PM Agree 0
    Kevin O'Brien: I agree 100% with your comments. I think that in general, fees and expenses would be less of an issue if professional, objective advice were part of the typical financial advisory engagement. A fiduciary standard and the removal of product-funded compensation would help to encourage this.
  • Robert | 19 May 2015, 10:29 AM Agree 0
    Looking at all of the comments it is clear that there is no perfect solution for everyone. That you are fee for service or that you use DSC funds the important part is that you do what is best for the client and with some clients DSC is the only way to go.
    Both models have their good and bad points. It all depends on the clients that you have. I know that from asking clients and doing surveys, 99% of my clients do not want to pay for service. They like it the way it is. But they all know what their costs are as well. Disclosure is your best friend.

    Over the years I have realized that the individuals with larger amounts of wealth do not need our planning expertise as much as the young individuals that are starting out. The individuals that do have money know how to budget and save and that is why they have that cash where young people need our help to show them how to save for their goals and objectives.

    Lets face it, most advisors just want to deal with the high net worth individuals, which is great but are they sacrificing their expertise in helping the ones that do need the most help and that could not afford to pay a fee for service.
    We all know what our costs are to bring in a new client and the costs keep on going up because of regulatory requirements. That will never change.

    I know that I have lost high net worth clients in the past because their children did not have enough assets to deal with the firm I was with, and that is not why I do what I do. I would rather have a smaller income but be able to help anyone that requires my expertise and that is what is most important to me, and those are the individuals that are most grateful.

    As far as clients wanting to bail out when we get market downturns, that will always happen. In my case, most of my clients do not panic in market downturns and most of them do not even call me because they know and have learned that I am there for them, and that if something has to be done on the short term, that I will let them know. That is the trust level and education level I have built with my clients.

    To make a long story short, there is no perfect compensation model. They all have their good and bad points. The main focus here is what you tell your clients and what they are comfortable with. They are priority one no matter what the size of their wallet, and our remuneration is just a by-product and the last thing we should consider.
  • Wealth Advisor | 19 May 2015, 02:06 PM Agree 0
    There is always a pro/con to everything and I enjoyed this article's "pro" view of DSC as a counter-point to the anti-DSC side previously published.

    We have already forgotten the Great Panic of 2008 -2009 and yes a DSC fund did cause a capitulating client ["get me out now"] to change their mind at the last possible second. Even though I was a FE @ 0% advisor at the time I was and still am -totally amazed that a small redemption fee of just over $100 had such an impact. I can confirm for sure that a DSC fund averted a panic sale at the bottom of the market. Never even got to the discussion of switching to MMF.

    It would make an interesting study in order to determine if DSC funds actually have better performance, have longer holding periods than their FE counterparts.

    Jack Bogle despises ETFs because -if it can be traded - it will be traded to the detriment of the ETF holder, says Jack. Liquidity can be a blessing or a curse.

    Although I am still a FE @ 0% advisor , I have a lot of matured DSC still on the books going back to the first ones in the 1980's. For the advisors too young to know the history of the DSC, yes indeed, they killed churning pretty much instantly because previous to the DSC, you earned commission only when you bought something. There were no trailers and mutual funds were traded like stocks. No trade - no commish! Therefore, earning renumeration (trailers) for not trading -was a revolutionary concept at the time. Avoiding charging a lofty FE to the client was a nice bonus too.

    DSC was a great way of selling funds back then and there was no moral hand wringing or ethical discussions about DSCs back then.

    Newer advisors might think this discussion as irrelevant but most of today's advisors are using FE @0 % which if you think about it, is almost the same as the AUM fee model.

    Therefore the discussion shouldn't be pro-this or anti-that. The CSA may put a halt to DSC, LL and FE all in one fell swoop so that will be end of all of these arguments/discussions!

    However, I believe most funds are sold as FE @0% today and to me, liquidity can be a potential advantage over DSC. Having said that in almost 28 years of selling funds, less than a handful of clients have every had to redeem their funds early and were charged a DSC fee.

    Churning? Sure a self-dealing advisor can churn the 10% free but he can also churn 100% of his FE funds just as easily.

    Which side is more correct?
    Like most veteran advisors, I have both types on the books but have transitioned my business to FE@0% for new purchases of funds starting about 15 years ago. I suspect most advisors are doing the same although many are transitioning away from both DSC and FE to fee-based accounts.

    Who knows, next year we might be arguing if 0.2% is too high for a AUM fee.
  • Dan Moore | 20 May 2015, 10:28 AM Agree 0
    This argument can go on forever. Most advisors that have been the business for a while and have large existing book will benefit from the elimination of DSC's and go to a no load with a larger trailer fee.
    You must remember from when you started your business you had no clients and no revenue. I have been in the business for 14 years and would not have made it without some sort or up front compensation. I'm not alone.
    The effect on up coming new advisors with a no load structure is ridiculous, they wont survive. Which has me agreeing with the direct to client comment thus eliminating the advisors, as their won't be any. That puts the industry a step back in my mind.
    The comments are all good. But in my mind its less complicated, there is already a structure in place that I use that supports everyone's concerns. A standard "charge back" system that pays the advisor 2.5 - 4% upfront based on a 3 or 5 year window, that charges the Advisor back the commissions not the client. This seems to fit nicely.
    The Client has access to high level services at reasonable cost and if the Advisor does not do a good job he loses his client and commissions. The client has no "life sentence".

    This would allow for new advisors to succeed and fulfill the need of replacing the older advisors with incoming talent.

    I don't know why but it seems like its the banks that will benefit the most here.

    Just saying...

  • robert | 20 May 2015, 12:24 PM Agree 0
    Its important to determine what value you provide to your clients. Are you a Pacer or a Porsche?
    Like any other profession financial services have generalists and specialists.
  • Will Ashworth | 20 May 2015, 12:31 PM Agree 0
    Great comments, Wealth Advisor. Be careful what you wish for, you just might get it.
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