Ducking the DSC ?? |
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OK, Bylo, you asked for this thread. I look forward to your comments as well as those of others.
BTW, for those who are unaware of what DSC is, required reading for this thread
Warren.
In a recent post to another thread, I was asked to start a thread on how to minimize the impact of the DSC (Deferred Sales Charge).
The idea is that once you have been investing in DSC funds for a while there may come a time when you decide that you'd like to exit some of the funds due to weaker performance, or a desire to re-orient your portfolio. Of course, you should first investigate the possibility of switching from a weak fund into another fund in the same family where you might feel that you could achieve better or more appropriate performance.
First I should make a couple of things clear here - I am a fee-only planner and frequently advise clients on investments. However, I do not recommend the purchase of mutual funds on a DSC basis, rather I normally use front-end load funds (with negotiated commissions) or no-load funds. OTOH, I am faced with some clients who have previously purchased DSC funds through another advisor and would like to exit or minimize the DSC exposure. In some cases there is a desire to exit the funds for performance or cost reasons (high MER, perhaps) and in other cases, the desire to exit the DSC fund is just a precautionary measure (in this case we might gradually exit the DSC version of the fund and perhaps even re-invest in a non-DSC version of the same fund).
There are several techniques which can be used to gradually exit DSC funds or that can be used to at least minimize your exposure to potential DSC. First however, you should always be careful of the tax implications of "selling" units of the DSC fund. Where the units are held outside an RRSP, redeeming units of the DSC fund would trigger realization of any accrued capital gains on these units. So if you choose to read on and would like to try using some of the techniques below, be careful of the tax hit that might be lurking. OTOH, if you sell a unit that has a loss, you would get to use the tax loss. Of course, if the units are in an RRSP then tax is not an issue.
In considering any full redemption, you must be aware of the date at which you have a reduction occurring in the DSC level. For example a fund may have been held for 2 years and 8 months and the exit fee might be say, 5% but this will drop to say, 4.5% after the fund has been held for only 4 more months. Obviously, one would wait out the additional 4 or 5 months until the exit fee rate drops.
In the meantime, you could redeem up to 10% before then in order to further minimize the exit fees. The 10% may apply to the original cost of the funds or the current market, always check with your advisor or direct with the fund company to find out the optimal amount to redeem without incurring any exit fee. If the time before you'd like to fully redeem the fund extends beyond the end of the year, investigate the possibility of redeeming a further 10% amount just after the beginning of the new calendar year.
You might also want to set up the fund so that all future distributions are paid to your brokerage account rather than being reinvested in the fund. Be careful though, in some cases the fund may prohibit further 10% exit-fee-free redemptions if the fund has been converted to "pay distributions" rather than "reinvest distributions".
I mentioned before that sometimes we actually redeem the maximum under the DSC fund holding and may then turn right around and reinvest the same funds that have been redeemed back into the same fund - in this case we are making the reinvestment at 0% FE in order to provide future flexibility in case cash is needed or in case we would like to move away from this fund entirely - note that the 10% annual exit-fee-free redemption privilege is not "cumulative" - IOW, use-it-or- loose-it. Taking advantage of the opportunity of exiting a DSC fund on an annual basis will permit some re-organization of the portfolio where you could take advantage of access to other fund families or even start to purchase some no-load funds.
Sometimes I encounter a situation where we really would like to redeem a DSC position (due to complete lack of performance, perhaps) and the fund is in an RRSP where the exit cost will have long term costs in terms of loss of potential tax deferral. Say the exit fee is down to 5% and the investment position is $15,000. Rather than cost the RRSP the $750 redemption fee, we look at the potential to swap the fund position out of the RRSP before we trigger the redemption - this way, the tax loss of $750 can be used outside the RRSP and we protect an additional $750 inside the RRSP for future tax-deferred growth. Be sure to ask about any cost to "swap" assets from the RRSP to your personal account - often there is a $25 charge for this transaction.
The most common problem with DSC is keeping an under-performing fund too long due to the "exit fee" - for a fund I looked at last year, the redemption fee was about 4% (since performance had never been above 4th quartile, we felt that this fund would never be a top performer, so we advised the client to redeem the position and pay the exit fee) - after the exit fee was paid we arranged a purchase of a strong no-load fund - in just under 4 months, the performance of the no- load fund that was purchased exceeded the performance of the DSC fund by over 5 percentage points. Not only did the new investment more than repay the cost of exiting the old fund but the new fund has continued to perform in the top quartile since then.
Of course, switching from a DSC fund into a FE is not easy, and you need to discuss the potential costs of some of these moves with your fund rep beforehand in order to assure yourself that you will not be redeeming exit-fee-free amounts and then incurring a 4% FE Load to reinvest the cash. As you are aware from reading many of the threads in here, the FE cost is negotiable (except with a discount broker) and you may be able to get the new purchase done for much less than 2% and in some cases, al little as 0% (or use one of the mutual fund sellers that provide FE funds for 0% as a matter-of-course).
If nothing else, investigating this will be an interesting and educational exercise for you. Not surprisingly, you might even find there is value in reading some of the details of the DSC, FE and trailer fee structure in the prospectus.
Good luck with this.
Warren.
Thank you Warren.
It'll be interesting to see what experiences others have had with this process. I noticed after I posted the above that jd and Rob (I think) had a few comments in another thread on the 10% annual redemption and rolling to a 0% FE with the same rep.
Rob and even DAMN YANKEE have made the point in the past that if an investor is using a good rep, then the rep should be willing to switch out of a poor DSC fund to a fund at another group and would refund the exit fee - now this is an attractive alternative, as well.
Warren.
Warren:
One thing to keep in mind when implementing such a strategy inside a RSP/RIF...watch your foreign content. The 20% foreign content limit is based on book value. If you begin taking your "free redemption", you could trigger an over foreign content in your RRSP.
Incidentally, I make it a personal policy that if I recommend switches to my clients' accounts which trigger DSC fees, I will rebate up to 100% of my commission on the new investment - whether they are new or existing clients. I'd rather give up some money than work with a mess of a portfolio. They start a new schedule, but at least they're free to move. BTW, Fidelity won't rebate commissions.
The only other problem I see with this strategy - confusion! Most companies used to have different share classes for their funds so that investors would benefit from lower MERs in front end transactions. All people were very confused about this and preferred not to have those options. Unfortunately, they didn't understand how they benefited from an admittedly cumbersome structure. But is just goes to show that even though it benefits investors, if they don't understand it, its value is limited.
Well said O FA - particularly good point about the FC limit, of course. This whole thread should have a disclaimer on it: Be real careful folks, if you wanna try any of this on your own
As to your point about confusion and working with a "mess", I couldn't agree more but in the end, some of this might help to consolidate a mess, improve returns and help the client better understand investment structuring.
Warren.
OFA, well said!! I, too, would rather rebate 100% of my commission than work with a mess, and do it on a regular basis.
Warren, as a matter of course, I usually try to make use of the 10% free withdrawal and the 0% FE - and there are some on this forum who've accused me of being "selfish" in this because of the higher service fee on the FE.
A few things to keep in mind regarding fee frees;
For many companies, the 10%fee-frees apply to only partial redemptions. If you redeem the whole shebang, in many cases you could be stuck paying the DSC on the whole amount. (IOW you may want to go through two/three steps)
Generally, you're entitled to 10% of current year contributions and distributions (some companies prorate, others don't), and 10% of previous year-end balance. As Warren said, use them or lose 'em.
Most companies have individual policies involving the switch of fee-free units. ie. AIC will NOT go from back end to front end, period. Any switch involves a redemption, be it RRSP or not. Trimark 's policy is the same except when going to its Trimark group of funds (non-select). Mackenzie is much nicer, if you switch funds, no problem, if its the same fund, you generally have to go through MMF first. Wow, all the different policies give me a headache (especially at year-end).
Anyhow, just more fluff to confuse matters.
dalt,
Re headaches, I know exactly what you mean. I'm trying to help someone to extricate themselves from a DSC portfolio that consists of 6 funds in 5 families. Reading the prospectuses gives me a giant headache that even an extra-strength Advil can't cure. That's one reason for encouraging Warren to start this thread.
Some companies (i.e. BPI) don't grant you the "freebies" unless you have held for at least one full year. Also, most companies count distributions paid in cash as part of the 10% free distribution.
Other companies (i.e.Dynamic was one) grant the 10% free priviledge but don't state it in their prospectus. So it was more a practice than an obligation on their part to grant this free redemption feature.
I am one of those who attempted to take advantage of the 10% free redemption per year. I had several AGF funds, and wanted to cah in the one with the worst return. It doesn't work that way..they make you take 10% of each individual fund. However I must mention that AGF was great to deal with and processed the transaction forthwith, which is more than I can say about other transactions I've requested with other MF companies.
And why did I have all my 6-figure mone in AGF Group..well when I was new to mutual funds, this was my FP's advice saying you get a better deal if you put all your money in one company!
I am learning though..thanks to this forum!
Geez...I forgot what I started off to say in my last message. So because they cashed in 10% of each fund, my foreign content is now sitting at 26% of book value. What does this mean...will I get a notice from Rev Canada or what??
Say I have one DSC Fund e.g. Spectum United Equity and I want to move it to E-Trade to take advantage of their 0% FE load. If I leave the current Spectrum fund as a back end load, can I buy more of this fund at 0% FE load?
In other words can I hold the same fund - part of which is back end and part is front end?
If you plan on keeping the fund for a long time, this could be a simple solution - all you do is wait until the back-end fee comes down to 0% while any new investments are not locked in.
Gilles, yes, you can hold DSC and FE (and in the same account if you wish.
Tucker, If you've got 26% of book value, you won't get anything from Revenue Canada - that's the trustee's job. You should be contacted by them (or your planner)
sorry to hear about your rep's recomendations. However, AGF does have a few good funds, I hope you're in them and not the dogs.
IF you left your INVESTMENT! in long enough you wouldn't have this problem. That's what MUTUAL FUNDS are about. Remember?
Josh,
is 10 years long enough for you? If the answer is yes and you invested in the MF category "other country equity", then the most you got is 0.7 per year (annual compound) with AGF Intl Grp-Japan. Check out Paltrak at www.pal.com/code17.htm. Did someone say GIC?
DISCLAIMER: Number 7 is in no way related to me.
Another point about the 10% annual redemption. It is my understanding from reading the CI prospectus that they will indeed redeem 10% of a DSC fund with no fee. However, the DSC is simply deferred, not forgiven. The DSC is applied to the remaining units. Therefore, if you redeem the remainder of the fund the next year, you will still pay the full DSC on all the units purchased.
I believe this would negate the "ducking" strategy discussed earlier. Does anyone know of other fund companies that follow the same policy?
This is very interesting - to hear first-hand the patchwork of rules out there is amazing - Rob, good comments on the refund of exit fees.
That tale on CI is quite daunting - imagine, redeeming 10% per year for 4 years and find the DSC (seemingly avoided) is charged against the balance left if it is redeemed in its entirety?
As for the 26% foreign content - get this fixed this month if you can - the penalty is a 1% tax per month on the 6% overage - consider redeeming sufficient book value of the foreign holdings. Otherwise, use this trick: if you own significant amounts of "strip coupons" in the RRSP, then see if transferring them out to a portfolio account (with the same broker) and then back in to the RRSP will sufficiently increase "book values" of Canadain content to bring the foreign content on side (hint: the reason for this "trick" is because the RRSP systems do not recognize the increasing value of strips for book value purposes until they mature - likewise, if you have good gains in a cdn bond fund in the RRSP, transfer this into a MMF in the RRSP (for ease, use the same fund co, as well) and back into the bond fund to trigger a crystalliztion of some additional book value).
Warren.
Great tips! Thanks! P.S. I am trying to get my FP to follow this discussion group. He told me tonight I am have two months to correct the 26% foreign content so I'll hang in til the end of Feb.and then dump bonds into MMF and then jump back in.
tucker, why two months?
I read that MF companies must report foreign content above 20% to Rev. Can. on a monthly basis.
You could theoretically go to 100% foreign content at the beginning of the month as long as you are back to 20% at the end of the month - not something I would do however. :)
What’s all this talk about rebating commissions? I recall (way back) once suggesting that a fee only planner license himself to sell funds and then rebate his trailer commissions to his clients.
When I did this, one of the FP’s (Rob?) ran to his closet, pulled out his club engraved with "PROVINCIAL SECURITIES REGULATIONS - IN CASE OF EMERGENCY USE TO BEAT INVESTOR SENSLESS" and gave me a good thrashing.
Now I understand it is permissible to rebate DSC commissions but not trailer commissions. Is it possible that these regulations can get any more inane? I mean, why on earth would one be allowed and the other not? Really makes you wonder whose side these regulators are on.
Chuck, yup, was me, and at the time it also looked like we were no longer going to be able to do the DSC rebate, either (thanx Ms Stromberg!)
As mentioned above, there are some companies who will NOT allow the DSC rebate, either.
If you really want to confuse yourself, pick up a copy of "the Act" and try and figure out what half of it says. Then, take a look at all the hodge-podge of "interpretations" out there. No wonder lawyers love the securities industry.
If after two or three years you move from one DSC Fund to another one in the same family, will the new Fund be credited the two or three years already included in the previous Fund?
Yes, your DSC schedual follows you from fund to fund within the same family
Thank you Rob.
What about the 2 months, I think that you may find the 1% cost on the 6% is there at month end - perhaps the rep is thinking that there is 2 months 'cause the report comes out at the end of the month and the noise about the problem starts the following month?
Seems strange to me - I can recall lots of noise about the distributions that create the foreign content problem in January, usually (IOW during the same month that the problem has been created).
Rob, any comments here?
Warren.
Another way of increasing book value in an RSP is to move the money in funds to money market and then buy them back a day to 2 later. Of course this strategy may or may not be beneficial depending what the market is doing. It worked for me.
Here's a 10% redemption story. I had purchased Trimark Select Balanced on a dsc basis a few years ago. In October I moved it all to MMF to crystallize my gains. My broker luckily forgot to buy it back as Grey Monday happened shortly after. I have been watching the prices and have been gradually putting the money back into the market. By the end of December I still had $2000 sitting in Trimark MMF. I wanted to withdraw my allowable 10% ($670)so I instructed my broker to take it out of the MMF rather than the Select Balanced. Trimark wouldn't allow this as they said it had to come out of Select Balanced. He couldn't reach me to tell me about the complication so I had to forfeit my 10% redemption for 1997. Live and learn. Now we both know about this quirk in the rules.
Bought Industrial Horizon Jan92(DSC)Switched to Ivy Cdn.when it started up still DSC,Split Ivy with Univ.Cdn.I called MacKenzie last week and inquired when my DSC was finished.Then informed me that Ivy was 1999 and Univ.was 2000.I asked why the different DSC's when all money was invested at the same period of time.The answer was that I had purchased more shares in Univ.with dividends.Oh by the way this is a self directed RRSP with (MRS thats another story)GO FIGURE!!
Katie,
Yup, Trimark is a tough one. They will not allow DSC to FE transfers within the select group. (That includes MMF)
The intermediate step taken in this case would be going to a non-select fund. Here there is no problem.
The difficulty your broker encountered is that Trimark came up with a standing order in Dec of 96, such that, if you place such an order, it will default to the DSC version. ie you requested a 10%fee free from Trimark Select Growth to Trimark Interest FE. This defaulted to Trimark Interest DSC. The units within Trimark Interest ARE fee-free, but they must be moved to non-select to remain that way(after year end).
Warren,
I haven't got a clue why the 2 months - doesn't make sense to me!
Hugh, Mackenzie basis DSC on the MARKET value. So, distributions would be added as "new investments", and would start a new DSC schedual. All of the other $$ would maintain the original one. Although you may have a time from that goes that extra year, it would be on a pretty small amount.
And, as Dalt said, Trimark is actually the toughest of all fund companies to figure the rules out with.
Sory folks, I am still confused.
I transferred my non registered DSC Select Canadian Growth to the Interest fund in December 1997. Does this mean that I cannot redeem 10% of this money fee free now? Or does this apply to only inter family transfers? I dont see why I cant move the 10% from the Trimark Interest (DSC) into Trimark Canadian and benefit from a lower MER, if my advisor agrees. Can I do this?
Someone mentioned that the 10% free is prorated by time owned for some companies. Anyone know which companies pro-rate the 10% free amounts. It was my understandiing that I could redeem 10% in December, and another 10% in January fee free, even if I made the purchase in December.
Thanks for your help.
Yikes!! what a confusing set of rules and variety of applications.
Rob, how does an FP who deals in this every day deal with this - do you just "know" the "house rules" of your favorites and follow the date purchased to calcualte the DSC impact and then when using a different fund or being asked to comment on a different family, then just make a call to that family's service reps?
Sorry, as an FP who does not use DSC, the way I work it is to be aware that it is a convoluted path to unwind some DSC funds (as we are seeing here) and I use some of the standard rules like the 10% annual withdrawal, and when I need a full redemption, I make a call to the fund co specifically for that client.
I just wonder, how terrifically accurate are the fund cos records? Has anyone ever found that they think the DSC should be LOWER than the fund co says, or that the fund co is out by a year or so.
(Hmmmm, I wonder if all the fund cos are going to Y2k compliant or will there be an unprecedented opportunity to redeem DSC funds 01/01/2000, when the fund cos system thinks you've owned the position for 95 years or so?? .... just kidding
Warren.
I think it was Bylo who suggested that one way to partially get out of DSC funds is to receive the yearly distributions in cash and not re-invest them in the funds. Is this commonly done? Does anybody care to comment?
Warren,
It's tough, darn tough to keep track of them all. But as you know, we all have our favorites, and after going through the process with your six or seven most used companies (for most of your clients), you become an authority on it after only one year end. But is that year end ever frustrating when you see a nice pile of rejected switches and then retrying while still trying to beat Dec 31.
Snoop, the fee-free units in Trimark Interest are no longer available. If you make a big stink and if Trimark didn't contact the rep about the free units being placed into DSC, then you MAY have an arguable chance that Trimark may free the units. However, this is dependent on the supervisor on duty, your rep's persuasiveness etc--no guarantees. It's getting late and its pretty much up to Trimark at this point.
Re: Those that prorate--the only ones I know of off-hand are Dynamic and GT, the rest that I deal with allow 10%of current year's contribution +10% of Dec 31st balance.
cheers
PS this is one case where I LOVE SDRSPs. No problems with any companies provided you redeem to cash and reinvest BUT there is the time concern that you miss a few good days.
Just dropped in.. What does DSC stand for??
I recently received a letter from Elliott and Page stating that they had changed portfolio managers. I had the option of accepting the change in portfolio manager, or redeeming units in the fund within 48 hours without penalties being incurred. (I did nothing). However, I wondered at the time, did this mean I could avoid DSC exit fees? Also, this is the first time I have received such a letter, despite owning MF which had changes in portfolio managers. Could this be a legal (eg. OSC) way of avoid DSC when fund managers change? Anyone with knowledge in this area?
DSC - Deferred Sales Charge (back end load)
Warren,
Dalt said it well - it's darn tough!! It would be nice if there was some sort of standard.
Fund company to fund company is bad, but sometimes the rules have changed within the fund company (for example, AGF. It wasn't too many years ago (1? 2? I can't remember) that they didn't allow ANY free withdrawal from RRSP accounts, and it was 12% from non-RRSP accounts. Pro-rated. Then changes, grandfathered the old 12%. Now a mess. Or, how about their change of MER on the FE? Old accounts were grandfathered here, too, and get an extra .5% added to the account each year (for I think it was 7 years? can't remember that anymore, either. Sheesh, alzhiemers setting in already!!)
I've never found a problem at the fund company re: DSC scheduales, but that doesn't mean there hasn't been any. Hey, here's to Y2K problems, eh?
Rob, great idea - standardize this & and investors lives would be much easier, I agree. Unfortuantely, this would also mean the "standardization" of the fees paid to FP/FAs from all funds - in itself not a bad thing, this would "level the playing field" between load funds in that all would be 4.5% (or whatever) and none would vary from this (5% or 6%??) as has been the case in the past. There is pretty good standardization in the trailers now, I uess the DSC stuff will be next - let's hope so anyway
Warren.
Re Standardization, ahem, ahem, ahem, but... [WARNING: Rant alert!] 1. DSC commissions vary all over the map. Just look at the blatant Spectrum United (and other) "bidding war" ads in Investment Executive. 2. Trailers also vary widely from (0%), ¼%, ½,, ¾%, to 1% depending on fund type, FE/DSC option, MF company, etc. (Even Altamira runs ads in IE not to tout their funds' great performance but rather to remind FPs that they too pay trailer fees. 3. And of course let's not forget the plethora of penalty-free redemption options for DSC funds that are the raison d'etre for this thread. FPs ought to be at the forefront in protesting against these and similar practices, for they are the ones who allow themselves to be duped by the MF companies into a patent conflict of interest situation. Physician, heal thyself. [End of rant.]
Bylo,
1) DSC commissions are becoming standardized. Your example of Spectrum is a case in point, they use to pay 4.5%, now pay 5%. Alot of the previous high payers have come down a little. Just a side note, it's why I've never been able to sell Hyperion funds - when they were first launched I was inundated with advertising bragging of their "hyper commissions" - I've never been able to get past that.
2)Trailers are becoming more standardized - MOST funds pay 1/2% or 1% on Equities (DSC vs FE), and 1/4% or 1/2% for fixed income. Not perfect yet, but it's getting better.
3) Redemption penalties - getting worse all the time. There is not even a hint of standardization here. And no current push (that I'm aware of) to move in that direction.
Some of us are pushing loudly for the industry to standardize. (It would REALLY make my life easier not to have to try and remember every companies redemption schedual off the top of my head!!)
Bylo, my point exactly .... nice Rant, BTW.
The competition for the FP's attentions is almost akin to an ancient bazaar - "no pick me, my price is best, .... no no, pick ME..." anyway, I'm sure you've seen the movie
My point is where is the validity of all this from the perspective of the investor ("lest we forget") in that these DSC-fee and trailer-fee "beauty contests" are ignoring the main event: the investor.
FWIW, if you think the IE spreads are "enticing" to the FP - you should see the action at the FP conventions with the display booths, the hospitality suites, etc.
I for one think that the industry should standardize along some simple lines of commissions for the commissioned-based FPs and also offer reduced MER structures for the fee-only planners to utilize. Cut the attempts to make MF investing as complex and innane as the insurance industry has managed to do to their industry with 15 q-zillion names (etc) for essentially the same product.
Sheesh, and you thought you were ranting. Sorry, I'll shut up now.
Warren.
Warren,
Subscribing to IE is easy. Now how do I get invited to the road shows and the hospitality suites? :-)
FWIW, I visited an IBM hospitality suite at a software conference last week but all I got was a cup of coffee, a couple of pens and a pocket notepad -- no ThinkPad, no free trip to their Hawaii office. I must be in the wrong industry :-(
For a really nice summary of these issues, see Peter Brieger's article, Is Your Investment Advisor Earning His/Her Keep? in the Feb98 issue of Canadian MoneySaver.
Bylo, Bylo, Bylo ...
For a really nice summary of these issues, see Peter Brieger's article, Is Your Investment Advisor Earning His/Her Keep? in the Feb98 issue of Canadian MoneySaver.
Yep. This is the absolute best article on this topic I have seen - really well put together. Unfortuantely, Dale Ennis has not seen fit to have a web site that one can browse for the article.
I would recommend everyone who invests in MFs in Canada read this - perhaps this should become a thread all by itself .... "Full Disclosure - Commissions III", anyone
Warren.
I got permission from Canadian MoneySaver to reproduce the article here Is Your Investment Advisor Earning His/Her Keep?.
Bylo, well done - the magazine is not even on the news stand yet (I was looking for a copy today).
Great link. All should read this.
Warren.
What...you're not already a subscriber??? Stop what you're doin' right now and sign up!!!
P.S. For you it's even tax-deductible, n'est pas?
Subscribe? Yes I think I will do so and send Dale Ennis a note to tell him how much I appreciate this article - in the past, I have found the Cdn Moneysaver to be a bit light on content (my opinion has changed on this now) and the articles were somewhat one-sided. I'll send in the subscription form next week.
Warren.
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