The long-time bane of many mutual fund investors, the deferred sales charge (DSC) is especially egregious when financial disaster strikes — as it did in March 2020. During the pandemic, some investors liquidated their investments in a hurry, and some paid DSCs to do so.
However, certain firms were willing to waive those DSCs.
Among a dozen dealers and manufacturers contacted by Advisor’s Edge, most respondents confirmed they dropped, or would drop, DSCs for investors in need.
During Covid-19, “We made accommodations for some clients that were under financial hardship […], and waived DSCs,” said Brent Allen, senior vice-president, financial services, with IG Wealth Management.
The firm encouraged advisors to come forward with situations in which hardship affected clients’ “ability to stay in [their] home or put food on the table,” Allen said. During past community disasters — train derailments or fires, for example — the firm also contacted clients to help with their finances, he said.
During the pandemic, a single-page waiver application included questions such as whether the client had accessed government support or applied for a mortgage deferral.
Requests had to be “reasonable and proportionate,” Allen said, and “a high percentage of [the applications] were approved.”
No advisor compensation was affected. “We took the financial responsibility as a company,” Allen said.
Requests weren’t numerous. Less than 10% of the firm’s assets have DSCs, with most “at the far end” of the schedule, and most clients had liquidity without accessing DSC funds, Allen said. Investors are usually allowed to redeem some of their DSC fund units annually without triggering charges — up to 12% depending on the fund, he added.
DSCs will be banned across Canada as of June 1, 2022.
NEI Investments, a subsidiary of Aviso Wealth Inc. that primarily offers responsible investments, said in an emailed statement that about 3% of the firm’s assets under management are in DSC funds, and most of those assets have matured — about 68%.
Since last fall, NEI said it received two requests from investors to waive DSCs, and approved both.
Investors in unmatured units wouldn’t pay DSCs when financial hardship or suitability is an issue, and such client situations would be considered on a case-by-case basis, said Fred Pinto, senior vice-president and head of asset management with NEI, in the statement.
The probability of waiving DSCs is “very high,” the statement said, because of the firm’s commitment to environmental, social and governance investing.
Further, the potential to waive DSCs extends beyond the pandemic. “If an investor made a request to waive DSC fees in light of financial hardship, whether due to the pandemic or other financial circumstances, we would honour that request,” Pinto said.
CI Global Asset Management and RBC Global Asset Management both said they would consider requests for DSC exemptions due to financial hardship on a case-by-case basis.
According to CI’s second-quarter financial statement, the firm paid $6.4 million in deferred sales commissions to dealers over the previous 12 months. That’s down from $10.4 million in the same quarter the previous year, $44.1 million in 2016 and $141.2 million in 2011. (Similar figures are not published by the other fund companies contacted.)
Sun Life Global Investments enacted a “temporary exception process” in 2020 to waive DSCs for clients experiencing “severe financial hardship and needing access to their money,” said John Killeen, vice-president and head of investment distribution with Sun Life Global Investments, in an emailed statement. That process has since expired and the only available exception to the payment of DSCs currently is client death.
More than one in five (22%) Canadian investors sold investments during the pandemic, and of these, 29% did so to cover expenses, according to an Ontario Securities Commission (OSC) poll conducted last fall.
Six in 10 of the sellers sold mutual funds, with just over one-quarter of this group (26%) saying they’d paid a fee for early withdrawal. Another 17% of the group said the fee was waived.
A couple of firms said they received no requests to waive DSCs.
National Bank didn’t see an increase in redemptions of unmatured units of DSC funds during the pandemic but would “support clients affected by the pandemic on a case-by-case basis,” the bank said in an emailed statement.
AGF Investments said it received no requests from dealers or investors to waive DSCs due to financial hardship resulting from the pandemic. When suitability is an issue — investors want to take on less risk, for example — clients can switch to a different AGF fund.
IG and other firms also noted the ability to switch funds if a client’s suitability profile changes.
“If an investor wants to change asset classes or manage their risk level, they should consult their advisor on the best plan of action, as they have the option to switch out of one DSC fund into another one without incurring any fees,” Franklin Templeton said in an emailed statement.
When investors transfer to another fund due to suitability, the DSC and redemption fee schedule continue to apply to the units of the new fund, CI said in its statement. No transfer or redemption fees would apply if the transfer is to the same series of an eligible fund, it said.
CI also noted that a transfer would be considered a disposition — potentially resulting in a taxable capital gain in a non-registered account — and may also be subject to a fee by the investor’s dealer.
Investor advocate Ken Kivenko, president of Kenmar Associates, said hard-hit investors that he’s helped in the past year have readily received DSC waivers from firms. “We haven’t had someone turned down when they pleaded [their case for a DSC waiver], and in most cases [firms] didn’t ask for proof of hardship,” he said.
However, he’s disappointed that regulators are allowing DSC funds to continue to be sold up until the ban’s June 1 effective date, saying that the regulators have a public interest duty to cause no harm, especially in an uncertain economy.
Further, regulators “exempted DSC” from the client-focused reforms, Kivenko said.
Many firms had already banned the DSC purchase option or announced plans to do so this year; yet, regulators provided relief from new requirements to put clients’ interests first to enable DSC sales until the ban is in effect.
No DSC sale is ever appropriate, Kivenko said: “Equal or better alternatives are readily available without negatively impacting liquidity.”
If more sales occur, “There’s not only harm, there’s likely accelerated harm, because people don’t even know how bad things are going to be at the end of this pandemic,” he said.
Assets within DSC funds have dropped significantly over the past few years as more firms stopped offering the products. From 2016 to 2018, there was a 31% decrease in DSC funds held by clients, representing $34 billion, the Mutual Fund Dealers Association of Canada said in a 2020 report.