The DSC Debate Rages On

April 14, 2019

The Canadian Securities Administrators have proposed a ban on the DSC sales option of mutual funds.    The Ontario government announced it didn’t support the proposal.  I agree with the Ontario government. 

DSC charges are not the problem. 

 

The high total, annual cost of MERs and TERs (trading expense ratio) is the problem.  Added together, the MER and TER pose a significantly higher long-term client wealth destructor than potential DSC redemption charges.

 

What is Deferred Sales Charge (DSC) and why does it exist?  I have a summary at the top of page three. 

 

I believe the Canadian Securities Administrators have missed the mark.  Are potential DSC redemption charges more damaging to wealth than the long-term impact of high MERs?  I submit the long-term impact of the MER (plus TER) is significantly more damaging.

 

MER and TER reduce return.  Understand the long-term effect of a high, annual MER and TER on portfolio growth.  At year 40, a two-percentage point performance drag results in a portfolio value of less than half.  Even a one percent performance drag is significant.  Forty years sounds like a long time.  It is, but, as if this isn’t obvious, a 40-year-old who lives to 90 has a 50-year time horizon.

 

I would rather see higher DSC revenue paid to the advisor’s firm upfront, higher charges for early redemption, and potentially longer DSC schedules, if this allows for a significant reduction in MER. 

 

Or, you can avoid the whole mess by being your own financial advisor.

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