The momentum to change the way mutual funds are purchased hit an unexpected roadblock.
Ontario Finance Minister Vic Fedeli recently announced that the new conservative government did not agree with reforms proposed by the Canadian Securities Administrators (CSA).
The CSA is the umbrella group for all provincial securities commissions. Six years ago, they started an exhaustive process that identified potential investor protection concerns. Finally, in September, it published its final proposed changes.
One way for investors to purchase mutual funds remains the Deferred Sales Charges (DSC) option.
When an investor purchases a DSC mutual fund, the selling investment dealer earns an upfront sales commission of up to five per cent, paid by the mutual fund company. In exchange for the investor not paying a commission to buy the fund, they agree to a hold period of up to seven years. If the investor were to sell in the first seven years after the purchase date, the investor would be charged an early redemption fee by the mutual fund company.
The CSA claims that in many instances, investors are not completely aware of the upfront commission or redemption fees, which start at approximately six per cent in the first year and decline yearly until reaching zero.
The response to Mr. Fedeli’s sudden and surprising announcement was strong. Organizations involved in the sale of mutual funds were supportive, while many representing investors’ interests were opposed.
With respect to the CSA’s proposed reforms, the Ontario conservative government’s stand will now cause a further delay in their initiative.
If DSCs are here to stay, my recommendation if you are buying DSC mutual funds, is to be sure your advisor discloses what they are paid upfront and as a trailer, and the possible penalties should you need to sell those mutual funds.
Peter Watson is an agent of, and securities products are provided by, Aligned Capital Partners Inc. (ACPI). ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments
