Investor Protection Takes A Step Backward

Deferred Fees or Deferred Sales Charges (DSC) on mutual funds are an enormous conflict of interest for an investment advisor.

As a client of someone who proposes to sell you one of these funds you need to know some basic facts that you will likely not be told up front.

You will be told that there are no sales fees up front and that if you hold them for seven years (or so), you will not have to pay any sales fees.

You likely won't be told that the annual management fee (MER) that is automatically deducted is in the vicinity of 2-3%.

You certainly won't be told that your advisor is being paid by the mutual fund company, likely about 5% up front on the sale to you of the fund.

Think about the conflict of interest there:

1) As long as you are, at the moment of sale, considered "suitable" for this investment (standard "Know Your Client" rules and regulations), that is the end of your advisor's legal responsibility to you. You are on your own and stuck for 7 years unless you pay a hefty penalty.

2) Ask yourself, who the advisor is actually working for? You (who pays him/her nothing) or the mutual fund company, who pays her/him the 5%. Plenty of studies have shown that investment advisor's skew sales of mutual funds to the companies that pay them best. Think about it. There is no advantage to you, the unsuspecting investor.

3) After your advisor gets her/his 5%, what incentive is there for them to look after you. Nothing financial, anyway.

4) In fact there is a huge incentive for your advisor to insist that you exit your fund early, pay the penalty (because he/she has found something "better" for you) and slip you into a whole new fund while pocketing another 5% commission.

I have seen it happen in my years as a branch manager and it is a shameless money grab and a very shady part of the investment business. However, it is extremely lucrative for the advisors and the investment firms and banks for whom they work.

This is bad news for the investing public.

But for us it is great news, because as more and more investors become aware of the lack of protection from the regulators, we will see more and more clients coming our way where they know that we have dedicated ourselves to looking out for their best interests.

Our Voluntary Code Of Conduct for The Stewardship Of Your Wealth