“Worried about DSC fees? Find out how to make 5%+ at the grid and not have to lock the client in!”

Intrigued? So was a Toronto advisor, who received this message from his managing general agent.

The answer was a life insurance-style chargeback schedule for segregated funds. If the client exited the fund within a fixed period, the advisor would have to repay the commission earned at time of sale—instead of the client being dinged with deferred sales charges.

On the face of it, that’s an improvement. The advisor gets compensated for the upfront work required to place the funds and, in theory, the threat of a chargeback keeps the advisor providing service for at least the next few years.

Win-win, right? Not so fast.

Advisors we talked to lauded the structure for freeing the client from undue exit restrictions. But some pointed out the advisor penalty could create another conflict.

“While the arrangement gets the investor off the hook for DSC charges, the benefit may be superficial, since this arrangement creates a powerful incentive for the advisor to keep the investor in the fund, even if it has ceased being optimal or suitable,” says investor advocate Neil Gross, president of Component Strategies Consulting.

Great advisors don’t intend to let compensation influence what they sell. Studies have shown, however, that loss aversion can be up to twice as powerful as the desire to gain. Lest you think yourself immune, researchers have found loss aversion to affect undergraduate students, pro golfers, foreign policymakers and capuchin monkeys. At the very least, the chargeback structure would be ill-suited to advisors who can’t stand to lose money.

As CSA says in Consultation Paper 33-404 (which doesn’t apply to seg funds or insurance licensees): “When deciding how to respond to a conflict of interest involving clients, only avoidance or controls (but not disclosure alone in most cases) are responses that […] can be fully effective.”

One company offering the product concedes it isn’t for everyone. A rep told me an advisor “would need to choose” which clients would be suited. “The main objective was to allow the client [to not have] redemption fees if he left. The advisor is taking the risk.”

That’s fair. But most common retail structures allow clients to redeem funds without undue charges. They just tend to pay out less up front—and there’s the rub.

Every structure is vulnerable to conflicts—advisors paid by the hour can drag out a meeting; flat-fee advisors can rush through planning. But it’s embedded commissions that have drawn the ire of regulators, and for good reason. A chargeback schedule is an improvement to DSC, but a marginal one, as advisors may be loath to recommend an exit, even if it’s the right thing to do. And, since seg funds don’t fall under CRM2, clients may never know about that perverse incentive.

Advisors must be paid fairly for their work. But minimizing one conflict while creating another isn’t a solution.

Melissa Shin is Editorial Director of Advisor's Edge. Email her at melissa.shin@tc.tc.

Originally published in Advisor's Edge

See all comments Recent Comments


Why nobody talks about Banks and GICs. 5 years locked in or redeemable with penalty? If a client cannot sustain an investment for 3 years why invest in a mutual fund? Today long term investing for many( especially millennials) menas 6 months! Funds are switched within the same company with no penalty

Tuesday, Sep 5, 2017 at 12:02 pm Reply


This is just another DSC that creates a conflict of interest…I agree with your comments and have one further comment to add. If I am an advisor that takes over an account with this load structure, I would assume I would inherit the liability of the chargeback? If that is the case, it may create an additional conflict if I want to make changes if the investment isn’t suitable. Furthermore, how does an advisor value a book of business if it’s made up of this type of load structure? My assumption would be it’s worth a lot less than a regular book as you’d need to discount for any outstanding advisor chargeback fees remaining.

Tuesday, Jun 20, 2017 at 7:18 am Reply


Thanks Melissa.

Regulators should consider early withdrawal by client subject to DSC charges as a failure in suitability and hold Advisors responsible for unsuitable recommendations. Most Advisors conclude long term time horizon for clients to facilitate to sell DSc/LSC Load type and no consideration of overall client KYC and other information including Health and potential situations.

It is insane to invest all or most of RDSP investments at DSC Load type, sometimes beneficiaries are not eligible for Grant and RDSP beneficiaries /Estate incur significant DSC charges.

Monday, May 15, 2017 at 8:49 am Reply

Add a comment

Have your say on this topic! Comments are moderated and may be edited or removed by
site admin as per our Comment Policy. Thanks!