“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.