In the January 2010 issue of the Canadian MoneySaver magazine, certified financial planner Brenda MacDonald talks about an “unsavory practice” in the mutual fund industry. If more people knew about it,”there would be a public outcry,” the Victoria, B.C.-basedindependent financial advisor says. In her own words:
” One little known piece of information that advisors dont share with their clients is that DSCs (deferred sales charges) dont get reduced if you are making regular contributions to a fund. For example, lets say in 2002 you put $5,000 into a mutual fund with a deferred sales charge. If you never added any new money to this fund, there would not be a penalty to get out of it in 2009 because each year that you held the fund the DSC had been reduced.
If instead you had been and are still making monthly contributions to a fund, your deferred sales charges will go on indefinitely and you never get the annual percentage reduction. Your penalty would be 6% to get out of your fund, now even though youve owned it for seven years. That seems very unfair to the person contributing regularly to his fund investment. Why penalize the diligent saver? I believe if more people knew about this unsavory practice, there would be a public outcry.”
Update:In response to a reader’s (Anthony) comment below, I contacted Brenda MacDonald for further clarification concerning whether the DSC was applied in staggered fashion according to date of purchase orwithout regardto purchase date. Here is what she said:
” The answer to this has been very difficult for me to find. I asked many mutual fund sales people and have also made enquiries with the mutual fund companies themselves. Most of the sales people have no idea how it works. The way it is supposed to work is first in – first out which would mean every year after the sixth year it would free up the shares purchased six years before. So yes, the DSC is supposed to be staggered. Whether it actully happens this way or not might be hard to prove as it is so difficult to track. Who is monitoring the mutual fund company records? I based my knowledge of this matter on clients mutual fund records I have seen when doing financial reviews.
I would gladly welcome more feedback about this subject. I think it is something we should all know more about especially the actual sales people who are selling these products”
Appendix: Deferred sales charges usually start with a 6% penalty if you sell in the first year you own it and then it is reduced by an average of 1% per year until the seventh year when there isnt any penalty to move your money out.