Deferred Sales Charges Kicked Me Where It Hurts
HOW I FELL INTO THE DEFERRED SALES CHARGE TRAP
This is my story of Deferred Sales Charges:
5 years ago, when I left my job at the time, I transferred my pension amount into a Locked-In Retirement Account (LIRA) at Investors Group (IG). I wasn’t fully aware of my options then, but my advisor recommended one of IG’s standard mutual funds, good for long-term investments like my LIRA (which I can’t legally access until I’m 55).
This was a time just before there was talk of low fees and robo-advisors so I didn’t think much about my decision. I’m sure we had a conversation about fees I would pay if I sold my investments but I didn’t pay much attention since I knew I wouldn’t be able to withdraw anything for another 35 years.
But even though withdrawals were not an issue, I never considered that I might want to transfer my LIRA into other investment products sometime over the next 35 years. If I had thought about that, I might have asked the question:
“What if I am not happy with my investments at some point in the future at IG and want to transfer to another financial advisor, or manage my money on my own?”
Unfortunately, I didn’t ask this question.
Four years later, I had learned a lot about investing and realized that I had made a mistake. The operating cost of my mutual fund was way too high and there were some great alternative investment options emerging that caught my attention.
I decided it was time to move on from IG and invest in a better product.
So I looked at my “Fund Facts” document and I found this:
What? I have to pay 4.5% to withdraw my money? Or wait another 3 years? Ugh.
DEFERRED SALES CHARGES: THE CONCEPT
Pretend for a moment that I work for a car rental company. You come to me and you want to rent a car for seven weeks. I get paid on commission, so this is very exciting for me. When you sign the contract, I get the majority of my commissions upfront! My company is awesome!
I show you the rental contract for 7 weeks, and in the contract it says:
“You have to keep the car for the full 7 weeks. If you return it before the 7 weeks is up, you have to pay some of the salesperson’s commissions(that’s me!). Please see the chart in your agreement for details, but as an example, if you return the car after 4 weeks, you have to pay an additional 4.5% of the total rental cost for the 7 weeks.”
You don’t think much about this because you’re going on a vacation for 7 weeks and you’re not intending to bring it back early. It’s all good.
So you sign the contract and get the car. Vacation time! Woot!
After 3 weeks, you notice this car is costing a lot in gas. More than any other car on the market. And you’ve also heard about this great new fuel-efficient car that you can rent at another agency.
You can’t afford to keep driving this car so you bring it back to me early. You’re already overwhelmed by how much you’ve already had to pay for gas, when I point out that you also agreed to pay a 4.5% penalty if you brought the car back after only 4 weeks.
You: “What is this penalty for again?”
Me: “It’s to pay my sales commission.”
You: “But I’m bringing the car back, which means you can rent it to someone else for another 3 weeks and get your commission that way.”
Me: “True, but you signed a contract agreeing to pay me anyway.”
You: “So I have to pay way too much to operate this car(in gas) and when I decide I’m not satisfied with my rental, you still get your full commission, and the opportunity to make more commissions by renting this car to another person for the next 3 weeks.”
Me: “Hey, I don’t write the rules, I’m just taking advantage of them. I told you about this when you signed the contract. In the future I suggest you do more research and understand what you are signing. Now come back soon, ya hear?”
BUT WE HAVE TO PAY OUR SALESPEOPLE!
Just like the car rental agency, mutual fund companies created incentives for their salespeople to push certain products. One of these incentives was a guaranteed sales commission.
The problem with guaranteeing a sales commission is that the mutual fund company doesn’t want to bear that cost themselves.
Mutual funds usually create some kind of positive return(income) for the investor, so the plan was hatched that the cost of paying people to sell the funds would be taken out of the returns of the individual investor over time.
These deferred sales charges would be in addition to the high management fees in place to cover the expenses of actually managing the fund so that it makes money. (I’ll talk about management expenses in detail in another post.)
But what if it takes a while for the fund to make enough to cover these commissions and there aren’t enough returns? Well, spread the cost out over 7 years, they decided. 7 years is generally enough time to ensure that the fund makes enough income to pay for the sales commissions.
But what if the investor transfers out their money before the seven years is up?
That’s easy – make the investor pay the difference.
GREED CAUSED MUTUAL FUND COMPANIES TO THINK THEY WERE INVINCIBLE
Does that make sense to you? A company hires someone to sell their products and then makes you pay the commissions?
You gave them money, agreed to pay their high management fees, and when you decided they were doing a poor job at managing your money, they say:
“We understand. Go if you want, but you’ll have to pay thousands of dollars to escape this terrible investment prison. You agreed to do this when you signed your contract.”
And maybe you were fully aware of the terms at the time. But let me ask you this. What if you had a totally honest conversation with your advisor at the time of the purchase – something like this:
“Ok, so you have to keep your money with us for 7 years. If you are unhappy with our performance anytime in the next 7 years, you have to pay money to get out. We structured the contract this way so that we are totally covered, and you are totally screwed if you don’t like what’s happening to your money. This 7 year thing purely benefits us. It does not benefit you in any way and basically forces you to stay with us whether you like it or not. Oh, and because our management fees are so high, this fund will have worse returns that an exchange-traded fund with super low management fees. You’d think that paying higher fees means a higher return, right? Yeah, I thought so too, but if you look at the last 10-20 years, high fee mutual funds don’t necessarily do any better than the market.”
Do you think you would have moved forward with the purchase?
Maybe, but you might have also looked at other options.
But that’s the problem when someone is selling you something. They won’t volunteer the full picture because it’s not in their best interest. Or at the most they will play it off as a standard part of the deal that really doesn’t affect you.
Always remember: they are not trying to help you.
They are trying to make money and protect themselves from losing money.
A STORY ABOUT THE ARROGANCE OF APPLE COMPUTER
Apple Computer was a billion dollar company in the 1980s and could charge crazy high prices for their computers because there was nothing else that compared to what they had. When they invented the Macintosh operating system in 1984, there was no stopping them. They had total market domination.
Then along came Microsoft and everything changed. Microsoft created the Windows operating system that worked on IBM computers and eventually many, many other computers. These other hardware companies charged consumers very little for a PC with Windows.
Apple was arrogant and thought that people would always pay extremely high prices for their computers and their “superior” operating system. They never felt the need to compete and that led to their demise(before they came to their senses and bounced back in the late 1990s).
Mutual fund companies are like Apple in the 1980s. They convinced us that we had to pay high management fees and agree to backwards deferred sales charges to get the returns on investment that we all want. We didn’t know any better and thought that we had no choice.
But the world has changed and it’s always changing. Maybe you will leave your money invested for 35 years, but wouldn’t it be great to have the option to move it if you wanted?
We have options now, in the computer world and in the investment world. There are exchange traded funds that have very low management fees and have 10-year returns that are higher than most actively managed mutual funds. There are companies who will create balanced portfolios for you and charge you virtually nothing to get you the returns you want.
SOMETIMES PAYING THE PENALTY IS WORTH IT
After learning about my 4.5% penalty to transfer out of IG, I was pretty upset and felt like my hands were tied.
I almost let them keep my money for another 3 years. Then I started actually running the numbers and it turned out the penalty wasn’t that bad.
If I paid 4.5% to move my money to a balanced portfolio of exchange traded funds that had similar (or better) returns and lower fees, it wouldn’t take me long to make back the penalty.
And I felt confident that I was better off getting out of a fund where all of my potential gains are eaten up by fees.
Most importantly, though, I bought my freedom. Freedom and mobility are more important that we realize.
If in 5 weeks or months or years, I’m not happy with the returns, I have the freedom to move my money wherever I want. There are no conditions, and no penalties anymore. And it feels great.
Now it’s your turn – break free of the deferred sales charge prison and take back your hard-earned money – and then invest it in whatever is best for you – wisely, of course.
10 thoughts on “Deferred Sales Charges Kicked Me Where It Hurts”
Great read thanks. Yesterday, I signed everything to transfer my money out of IG due to terrible returns and high fees. So much for professional management. It’s costing me an extra 1800 to get the money out on top of the 1400 plus a year they were charging me for a 3.5 averagev ROI. Pathetic. How many others have unfortunately learned or not the same lesson. Mutual funds are a gasping industry I would think. What are you invested in now? I’m playing the stocks now.
Thanks Darrell! Glad you got yourself out! I think it will be worth the cost in the long run. Now I have my money diversified across low-cost ETFs. Going for the long term growth. Good luck with stocks and be sure to not buy too much of one company. 🙂
Im going through the exact same thing with IG now Investors group wealth management. They did not disclose fees and did not report them on my statement. Terrible returns and high fees.
Ive been searching for others going through the same experience, its the wish I knew now.
Investors Group are not a financial management company they are only interested in lining their own pockets with fees and they do not manage your accounts.
Hi Denise! Thanks for the comment. I’m sorry this has happened but glad you are taking steps to reduce your fees.
Hello, How do I fight this ridiculous DSC fee? They told me that my money would have no fees after 7 years. at year 5, portfolio A discontinued so they told me that I may no longer contribute to Portfolio A so we are investing your money on Portfolio B. After 8 years I decide to take out my money as it was returning poorly and the management fees were outrageous. To my surprise they charged me DSC fees on the portfolio A! Any leads would be greatly appreciated. Thank you
I’m leaving IG and will take the kick. IG just did a massive shift of portfolios and guess what, DSC’s materialized. That’s what happens when you deal with a salesman rather than a financial advisor. Investment prison is an apt descriptor when you’re dealing with IG. They claim the DSC’s were invented to help their investors develop long-term discipline. In effect, we get disciplined over the long term. Always beware of salesmen offering to do anything solely for your best interest.
I thought these fees were discontinued a few years ago. Am I missing something in the news reports regarding IG.?
Hi Joanne! Yes, I hope that you can’t still get a fund with deferred sales charges. This post is from 3 years ago. Thanks for the comment!
I guess it is like an Insurance Policy. Sales people get money when they sell it, I pay the premium for 40 years and even the 4th Plauge in my lifetime hasn’t killed me. Now when I am in my early 60’s the price of insurance is sky high.
With my Investors Group portfolio, we haven’t matched my brother in law for the past 5 years, but now he is crying. So I don’t know what the answer is…if you put it in the Bank yo get 2 %…and now the banks are going to be treading water.
I cannot find details about how DSC is calculated. If some shares were purchased more than 7 years ago, can this number of shares be sold without penalty? Also, how are reinvested dividends treated in the DSC Calculation? When the ban on DSC becomes effective in mid-2022 for most provinces, what happens to the penalties for existing holders of Series A funds?