'Ban DSCs - they do nothing for the client'

'Ban DSCs - they do nothing for the client'

The wealth management industry would be “better and cleaner” if it banned deferred sales charges, according to a veteran advisor.

Bruce Loeppky, of Portfolio Strategies Corporation, has been in the industry for more than 20 years and began his career selling DSCs because that was the only option at the firm he worked. But he soon came to the conclusion they did “nothing for the client”, transitioned to front-end fees and has not sold DSCs for years.

The Surrey, British Colombia-based advisor thought the tide was turning a few years ago after Investors Group eliminated the fee structure. But that momentum has stalled, despite regulators proposing a ban, with Ontario Premier Doug Ford pushing back strongly against the CSA.

Loeppky said DSCs are too open to abuse from advisors drawn to the “big hit” on a sale, something he believes smacks of hypocrisy when many preach that they have the best interests of the client at heart.

He told WP: “For them, getting a small trailer fee doesn’t turn their crank much, but getting $4,000 in one shot does. The problem is with the client - it does nothing for them.

“Sometime clients say ‘I don’t need that money’, but then somebody gets cancer, you lose jobs or various other things that happen in one’s life, and then all of a sudden you are pulling out this money. Say the market is down 15-20% and then you are also paying 6% for every dollar you pull out, that makes it a pretty costly hit.”

He added that for the industry to truly change it needs one of the big players like Fidelity or MacKenzie to come on board and eliminate them, but Loeppky believes that because there are a number of advisors still wielded to them, firms don’t want to leave 10% of business on the table.

“For a few guys who live and die by them, they have some kind of attitude that they deserve them,” he said. “If those guys heard that Fidelity, for example, wasn’t offering the DSC option any more, they would just move to MacKenzie or AGF or some other company.”

The CSA’s proposal, which includes banning DSCs, including low-loading options, and limiting the use of trailing commissions, is still out for consultation. In submissions, many investors criticized regulators for continuing to allow DSCs and questioned why a consultation was even needed.

For Loeppky, the biggest issue is the way it opens the door for abuse in the form of churning: selling a fund on a DSC, moving it front end and then flipping it back on an ongoing basis so they are continually getting commission; or waiting the six or seven years, moving it front end and then switching it to a ‘better performing’ provider and flipping it back to DCS in the process.

Even when an advisor offers up a DSC alongside the option for the investor to pay an upfront fee for his or her services, many clients shy away from losing a few grand in one fell swoop because retirement may be many years in the future.

Loeppky, who admits he is "small fry" with a business of about $15 million, insisted the cases of abuse come down to greed and people taking advantage of investor ignorance.

He said: “I bump into some guys who are stuck on DCS who say ‘why should I sell it if I don’t get paid? I don’t work for free’.

“But say the client bought $100,000 and you did some preparation work for them, deciding what to invest and doing the transfer paperwork, as soon as the client invests the money, even if it’s front end 0%, you are going to make around $1,000 a year on that - 1% minus the little bit you are paying the company you are working with.

“You are getting paid $100 a month, so you visit the client twice a year; you’re still getting $300-400 each time you visit the client.”

Crucially, the client is free; free to move from the advisor if you don’t give them good service and free for the advisor to move funds elsewhere if a company’s fund suddenly become less attractive.

The only reason for DSCs, according to Loeppky, would be for advisors just starting out. He said: “Some guys might need to stay in the business. I could say you can use DCS for five years after you get licenced but not after that. But there is still abuse with the churning.”

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