The Financial Insight by Lior Hershkovitz blogtakes issue with an article by Dan Richards defending deferred sales charges (DSC) on mutual funds. DSCs are charges of up to 5% on redemptions of mutual funds within a certain number of years after purchase. Richards thought they were justified because financial advisors often need to spend a lot of time upfront with a client and if the client walks away shortly afterward, their remuneration will be low without the DSC.
But lets say the investor bought into the mutual fund because he or she was impressed with the portfolio managers star performance, or liked their style of investing. Then, a year or two later, the star manager leaves for another fund, or switches to a different investment style — say from value to growth. Essentially, the investor now owns an entirely different product than what they agreed to purchase.
Yet, they face a charge of up to 5% should they decide to pull out. Thus, while DSCs might make sense from the salespersons point of view, they dont necessarily make sense from the consumers point of view.