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How to avoid Deferred Sales Charges (DSC)

April 13, 2012 - 7 comments

For most Canadian investors, making the switch from high-cost, actively managed mutual funds to lower-cost, passively managed investments can be intimidating; it can also rack up substantial fees – mainly, deferred sales charges.

In many cases, it can make sense to incur these fees and move on – however, the thought of paying a large penalty to a mutual fund company does not sit well with most investors. If the latter sounds like you, I have outlined a number of steps that will assist you in reducing the impact of, or completely avoiding these deferred sales charges. We will assume in the examples that the investor currently holds the following investments in their RRSP.

Sources: CI Investments Inc., Fidelity Investments Canada ULC, Invesco Canada Ltd.

 

Step 1: Create an Investment Plan

This can be as simple or as complicated as your situation requires – as a minimum, you will need to determine a target asset allocation and choose a “wishlist” of investment vehicles that you would implement if you weren’t currently handcuffed to your actively managed mutual funds. In the example below, a balanced ETF portfolio has been chosen (consisting of 40% bonds and 60% stocks) with a total market value of $250,000.
 

Sources: BlackRock Canada, Vanguard Group, Inc.

 

Step 2: Collect Data

This next step will involve contacting every mutual fund company that you are currently invested with to determine the following:

• Total number of free units or total market value of the fund currently available to redeem free of charge
• Any additional units maturing in the current year
• Total deferred sales charge on full redemption
• Final maturity date

At the beginning of the call, ensure that you write down the date and time of your phone call, as well as the name and extension of the client relations representative you speak with. Most fund companies record all calls, and if a mistake is made, determining who is at fault will not be an issue (as long as the fund company can easily locate the recorded call).

 

Step 3: Sell all Free Units and Front-End (FE) Funds

In the example above, we will assume there were no free units available for the CI Signature Canadian Balanced Fund, Class A (CIG785) or the Fidelity Global Asset Allocation Fund, Series A (FID349). All units of the Trimark Global Balanced Fund, Series A (AIM1773) are not subject to deferred sales charges, so will be sold immediately.

 

Step 4: Switch Remaining Units to Bond Funds

Switching any mutual fund units still subject to deferred sales charges to lower-cost bond funds from the same fund family can help reduce costs and simplify a portfolio. It is also less probable (though not impossible) that a bond fund manager will underperform his benchmark by a large margin, relative to an equity manager. In our example, I have listed two options below that could be considered (I have also included a list of bond funds from various companies that you can research and consider for your own personal situation). I would recommend calling the fund company before switching funds to ensure no charges will be levied (and that the switch is allowable).


Sources: CI Investments Inc., Fidelity Investments Canada ULC


Step 5: Purchase New Investments with Cash

Now that we have $150,000 of cash available from the sale of the Trimark Global Balanced Fund, Series A (AIM1773), we can purchase $50,000 each of XIC, VTI and VXUS. This results in the following semi-passive portfolio with a significantly reduced MER of 0.76% (relative to the original MER of 2.57%).
 

Sources: CI Investments Inc., Fidelity Investments Canada ULC, BlackRock Canada, Vanguard Group, Inc.

 

For this particular investor, the annual cost savings is $4,525 [$250,000 × (2.57% - 0.76%)]. Going forward, the investor will need to contact the remaining mutual fund companies at the beginning of each year to determine what amount they can sell from the funds without incurring any deferred sales charges, and make the necessary trades (the proceeds can then be used to purchase the iShares DEX Universe Bond Index Fund (XBB) as originally planned).

As the example above illustrates, with a little ingenuity, you can begin to reduce your fees considerably without incurring the dreaded deferred sales charge. Although this example is relatively straight-forward (and does not consider any tax implications of switches or asset location decisions), it should still be a useful guide for the average investor who is fed up with high-fee mutual funds.
 

 

By: Justin Bender with 7 comments.
Filed under: Fees
Comments
  25/02/2016 3:17:57 PM
Justin Bender
@Bob - I have been throwing around the idea of a paper dedicated to this subject. If I do happen to put something together in the future, it will include updated suggestions (the current list should still be similar to the funds available today).
 
  25/02/2016 10:31:51 AM
Bob
Wondering if you could post a new version of this for 2016?
 
  12/02/2014 4:33:08 PM
Justin Bender
@Kyle - just try to choose one of their lowest-cost, plain-vanilla funds. I've included 2 such funds in the fund list above (although I think Mackenzie has dropped the "Sentinel" from the name since the time of writing).

Justin
 
  12/02/2014 4:05:48 PM
Kyle Halford
Justin ... just curious what criteria you used for choosing the lower cost bond funds (within family) ... I'm going thru this scenario and most of the "switching" will occur in the MacKenzie family ... they have considerable bond / FI choices so wondering how best to evaluate? My target asset allocation is 70 equity - 30 FI. My "remaining" DSC restricted mutual funds will almost equal this 30% so, at least at this time, I just need to go thru a switching exercise on the FI side.
 
  25/02/2013 10:01:35 AM
Justin Bender
@Matt - I wouldn't suggest changing your target asset allocation. If you're moving to RBC DI (and presumably implementing a low-cost, passively managed, index portfolio), you may want to consider taking the DSC hit. For example, if you're currently paying 2.20% for actively managed mutual funds, and you could switch to a passive DIY approach for a cost of 0.20% per year, that's an annual savings of 2%. Even if you are charged a 6% DSC, it will only take you 3 years to recoup that cost.

Something to think about...

J
 
  23/02/2013 10:00:50 AM
Matt
Hey Justin - great post, thanks. In the process of transferring my portfolio to RBC DI and stumbled upon this advice which I will surely put into action.

Question for you though - my target asset allocation is 70/30 equity/fixed. I have roughly $305k in mutual funds. I anticipate liberating about $90,000 after selling the FEL funds and the 10% 'free' units.

Is it wise to switch the remaining $215k all into bonds to wait out the DSC charges? This skews my asset allocation to 70% fixed. If so, would you recommend any particular weighting between the short-term and regular bond funds you have suggested above (if it makes a difference I'll be switching into CI/Dynamic/Fidelity funds).

Having that much money in bonds just makes me feel like I'm putting all my eggs into one basket, so to speak... particularly in this 'nowhere to go but up' interest rate environment.

Any thoughts on putting a portion into money market funds to wait out the DSC? Almost zero return, but safer from rising interest rates?

I hope this gets back to you, the thread is nearly a year old, but I could use your insight. Thanks for any suggestions.
 
  04/08/2012 9:54:42 PM
Prasanna
HI Justin:Amazing great advise. I wish I had known of this website before I sold all my DSC Signature mutual funds and paid all those DSC charges.
best regards
Prasanna
 



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