Sir Oliver Mowat statue at the Ontario Legislative Building in Toronto
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Funds with deferred sales charges aren’t banned in Ontario, but that doesn’t mean they have much of a future in the province.

Last month, the Canadian Securities Administrators banned deferred sales charges (DSCs) on new purchases, effective June 2022. At the same time, Ontario proposed rules for selling DSC funds, including prohibiting sales to clients over 60, capping account sizes at $50,000 and limiting redemption schedules to three years.

Regardless of Ontario’s decision, DSC fund sales have already dropped to a small proportion of industry assets.

“The DSC option remains in deep net redemptions (uninterrupted since 2008),” said financial services research firm Investor Economics, an ISS Market Intelligence company, in an email.

Preliminary data from September 2019 suggest DSC assets in Canada have fallen below 9% of the industry total, the firm said, and gross sales accounted for only about 2.5% of the total in the first nine months of 2019.

The decline is in part attributable to firms such as Investors Group and Dynamic Funds no longer offering new purchases of DSC funds.

The latter is managed by Scotiabank subsidiary 1832 Asset Management L.P. In an email, Scotiabank said Dynamic has a “small” amount of assets in legacy DSCs and low-load options. ScotiaFunds offers no DSC or low-load purchase options in branches, and Scotia iTRADE blocks the purchase of DSC options, it said.

While RBC Global Asset Management (RBC GAM) said in an email that DSCs are included in “a number” of its funds, the funds represent less than 1% of its total mutual fund assets under management.

Other firms are considering their responses in light of the new rules.

National Bank Investments said in an email that while it offers fund series with DSCs, it’s “still assessing the situation following the recent OSC and CSA publications.”

Franklin Templeton Canada said in an email that it’s “studying potential options to address the new rules” regarding the DSC funds it offers.

Half a dozen other manufacturers contacted either didn’t respond or declined to comment on whether they were still offering DSC funds.

Some firms still offering the funds cited a desire to maintain choice for clients and dealers. RBC GAM said its funds “are offered in a variety of advice and service models to ensure investors have access to a wide range of options to meet their investing needs.”

Similarly, AGF Investments, which still offers DSCs on some of its mutual fund series, said in an emailed statement that it’s continuing “to ensure that our lineup of products can accommodate any fee arrangement that the dealer might want to put in place.”

The firm said it would work with dealers to “support them in navigating these proposed industry changes.”

Guy Anderson, an advisor with Aligned Capital Partners in Toronto, said in an email that he expects dealer demand for DSCs to dwindle as tech — from digital onboarding to e-signatures for KYC updates to virtual meeting tools — allows firms to cost-effectively serve smaller clients.

“Many dealers now have access to technology that makes the cost of client acquisition and service far lower than it once was, which significantly lowers the asset level at which an advisor could be fairly compensated without using [a] DSC,” Anderson said.

Fee transparency will also decrease demand for DSC funds, he said. “The trend to separate fees from product is accelerating, and DSC will eventually be eliminated.”

As it stands, the sale of DSC funds by some dealers and not others “creates an environment that is not only confusing for the public but industry participants as well,” Anderson said.

Ontario’s proposed rules for DSC funds are out for comment until May 21, and would be effective on June 1, 2022, the same date that the CSA’s DSC ban takes effect.