Are Deferred Sales Charges Holding You Back?

Many investors eventually come to the realization that the mutual funds sold by their bank or investment firm come with unjustifiably high fees. Making the switch to low cost index funds or ETFs sounds like the easiest, most logical choice, however there is typically one final hurdle for investors to overcome.

Deferred sales charges – or DSCs – are a clever little trick designed by the mutual fund industry to compensate advisors and keep investors locked-in to their investments for a minimum length of time.

According to MoneySense’s Preet Banerjee, mutual funds originated in Canada in 1932 but didn’t take off until the invention of deferred sales charges in 1987:

How Deferred Sales Charges Work

A deferred sales charge schedule might look like this:

  • 1st year penalty – 5.5%
  • 2nd and 3rd year penalty – 5.0%
  • 4th and 5th year penalty – 4.0%
  • 6th year penalty – 3.0%
  • 7th year penalty – 2.0%
  • After 7 years – 0.0%

Let’s say an investor has $50,000 tied-up in high MER mutual funds at Investors Group. The average MER for her funds is 2.76% and she wants to switch to a portfolio of TD e-Series funds, which cost just 0.42%. But she’s only held her investments for four years and so she’d have to pay a $2,000 penalty (deferred sales charge) to sell the funds and make the move to TD.

Related: My two-fund solution

Now, most fund companies allow investors to redeem up to 10% of their units fee-free each year, meaning that this investor could withdraw $5,000 without penalty, reducing her total deferred sales charge to $1,800.

Some investors might feel compelled to stay put until the DSC schedule has lapsed or the fees have been reduced further, but at what point should the investor say, “screw it”, and just make the switch to the lower cost funds?

First, you’ll want to do some quick math to see the difference in dollar terms between the funds you’re leaving and the funds you’re moving to. In this case, the Investors Group funds cost the investor $1,380 annually, while the TD e-Series funds would cost just $210 per year – an annual savings of $1,180. It would take less than two years for the investor to come out ahead after making the switch, even though she ended up paying the $1,800 penalty.

Besides the mathematical solution, there are a number of behavioural reasons to make the switch sooner rather than later. I reached out to Canadian personal finance experts Rob Carrick, Preet Banerjee, and Dan Bortolotti to find out their thoughts on when (and why) it makes sense to pay the deferred sales charges on mutual funds.

Mr. Carrick, The Globe and Mail’s personal finance columnist, said he’d lean toward ripping the band-aid right off.

“A lot of this comes down to the total dollar cost of the deferred sales charges and what percentage of total assets they represent. The MER-related cost savings as shown (in the above example) are substantial and could probably offset the DSC in a few years at most.”

The decision also depends on what the investor is switching to. Moving from Investors Group to a do-it-yourself portfolio of stocks or ETFs can mean significant cost savings and a stronger argument for eating the DSCs right away.

“By contrast, if she’s moving to a fee-only advisor then the breakeven period is longer because the cost savings is lower,” said Canadian Couch Potato blogger Dan Bortolotti.

Banerjee says paying the fees and going forward for behavioural reasons makes a lot of sense because the investor can move ahead with one plan and start developing better habits right away. She’d also avoid second-guessing herself while she waits for the DSC fees to expire.

Related: How to transfer your RRSP from one bank to another

Gradually transitioning out of a DSC schedule sounds appealing, but Bortolotti says that some investors just won’t follow through, since it would require them to keep a close eye on things over a couple of years and send the instructions at the right time.

“I’ve seen investors fail to do this, in part because it’s just so discouraging to drag around those crappy funds for so long.”

Finally, Bortolotti suggests that investors evaluate just how bad their advisor relationship is. He says some DSC advisors are harmless, but others are aggressive in promoting loans and other destructive practices.

“If the client and advisor have a bad relationship I would be more inclined to just pay the fee and get out. If the advisor is willing to help you transition gradually, then that can make more sense.”

Readers: What is your experience with deferred sales charges? Did you make a clean break, transition out over time, or are they still holding you hostage?

Print Friendly, PDF & Email


  1. aB on April 10, 2015 at 8:24 am

    Still transitioning out over time (10% a year) to a no load fund. Time to exit completely, will either be when the DSC ends(T2033 to self directed) or when we buy a house (through HBP).
    Luckily, there was only about $6000 there, as my first mistake, lesson learned, tuition paid.

  2. Barry @ Moneywehave on April 10, 2015 at 8:43 am

    When I went DIY I was ready to eat the DSC since I was so angry with my advisor. Fortunately I had proof that my advisor didn’t disclose the DSC or MERs so the DSC were waived when I switched out.

    • Rob on April 10, 2015 at 12:33 pm

      Just wondering what proof you had of a negative?

    • Well done on getting a refund Barry. I have been working with a 72 year old who put $500k in a famous income fund . He wasn’t sure at the meeting so asked if he changed his mind were there any exit fees and was told no so signed up under pressure thinking he could change his mind.
      Later he did and was told about the 5%.
      The only witness he asked was his wife.
      The insurance company say its Ok to sell something with a 7 year tie in to a 72 year and he was given a fund fact sheet so should have known. We pointed out the follow up letter says it was emailed and the farm has no internet , he has no email.
      They then just reply you signed the KYC document and the application saying you understood .
      Each communication takes 8 weeks between.
      He took his adult son to meet the sales rep and said why didn’t you tell me. The answer was ” I didn’t think you would ever want it out”. unfortunately they didn’t record the conversation.
      He has just given up but its blighted his retirement.
      Was a “friend” of the family makes it worse
      His only option seems to be OBSI and he commented ” I will be dead before its resolved”

  3. May on April 10, 2015 at 9:48 am

    I did both. I transferred 10% over several years and when the DSC got to be less than the difference between the book value and the market value, I transferred the balance. I am now a very happy DIY investor.

  4. Rob on April 10, 2015 at 12:32 pm

    Many advisors have not been using DSC for some time – so not everybody has to deal with this.

    Just some thoughts on the direction of your article: when DSC was introduced, it replaced a standard FE charge of 9% – hard to fathom today, but compared to what was, DSC was a pretty good opportunity.

    Correlation does not equal causation.

  5. The Professor on April 10, 2015 at 1:04 pm

    Really good subject for an article. Too few people are aware of DSCs, yet they’re very important!

  6. Paul N on April 10, 2015 at 3:43 pm

    Similar story…

    The GF got cornered by 2 Prime America “agents” who use family gatherings and community gatherings to zone in on their prey. After signing her to to a “catch up” high % rate leverage loan (a person who really shouldn’t be suitable for that strategy) she was promptly sold some high MER high DSC funds. The fund proceeded to lose half its value soon after that. They did come back up somewhat, and as above we cashed out the portion that was down to about the same cost as the MER and I helped her invest elsewhere. Recently the remainder followed.

    My favorite part was the phone call after about 5 or 6 years when the fund finally had a decent 1 year return where the agent wanted her to buy more… It was a fun phone call. At one point during the call, I remember the guy justifying DSC’s so HE gets paid. (forces the client to pay his commission for 5 years). Sad story but this scenario plays out every day somewhere.

    Sometimes it’s good to cut and run but always good to at least run through the numbers like you have. Good post.

  7. Also depends if you are in a fund company or dealer / own brand fund. If you are in say a Fidelity of Mackenzie fund you can transfer it to Questrade who will pay you the trailer , take the 10% free each year and decide when to suck up the DSC.
    When its really bad is if you are in an own brand fund , you cant move it away without incurring the DSC.
    As well as the difference between the MER in existing fund to the MER in the new fund look at the performance. Most mutual funds underperform the market so if you are going indexing you would save maybe 2% on the MER and 2% in lost growth?

    I also agree if its a toxic sales person you are dealing with get out. If you move some and annoy them you wont be rebalanced or get any help anyway in future

    • Paul N on April 10, 2015 at 5:05 pm

      @ Kathy

      Not sure if you were sort of replying to my post. I’m not 100% sure what you mean by your second paragraph. 2% lost growth if you switch to a better performing security?

      With this type of masquerading “advisor” there is no active management or re-balancing or even any kind of portfolio set up from the outset. It’s a one fund fits all strategy.

      So as a “fee only” planner do you usually put your clients in low cost index funds or “F” series funds?

      • Hello Paul,
        No it wasn’t a reply to your post just a comment.
        I meant that if you are in a poorly performing mutual fund and went to an index fund or ETF then you would save the MER difference PLUS the under performance of your current fund compared to the index fund you are going to by moving . So depending on how badly the mutual fund you are in is doing ( and the DSC ones are usually the big tied sales force own product piece of Cr@p ) then you will probably make up the DSC quicker than just the comparison to the MER.
        The SPIVA Standard and Poors Index vs Active survey shows us this. On average only about 5% of Canadian funds beat the market over 5 years and that’s ignoring the ones that ceased to exist or were quietly merged into bigger funds.
        I do a comparison of how the clients fund has done to the benchmark to show this.
        I am an advice only planner. I refer to my son who is a registered investment advisor. He uses ETFs and charges a flat fee based on complexity , he doesn’t charge a % of assets or commission.

        I think the message is buyer beware and don’t be complacent
        Also be careful some index mutual funds have huge tracking errors over the benchmark. probably another blog for Robb there.

  8. Neil Murphy on April 11, 2015 at 2:13 am

    I used to say to my clients: “The commission you owe has been paid to the broker by someone else, now you are going to pay it back one way or another. If you stay, you pay because of the lower fee you could benefit from, if you pay, well, you pay.”

    When I used to do the math on this, if a client was moving to a low cost etf, then invariably it was better to pay the DSC and get out of Dodge.

    It’s like, you are going to pay one way or another, which one do you think you pay more on, the fee you see, or the hidden one? The hidden one every time.

  9. MJ on June 13, 2018 at 12:20 pm

    Still holding me hostage. Three years after reading this article, my husband and I still can’t transfer our Investors Group RESPs to our TD eSeries RESPs. We’ve attempted twice and failed. Both institutions say there’s a problem on the other institution’s end. So we’ve given up for now.

  10. Jason Kaye on May 30, 2020 at 10:52 am

    Before DSC I had to pay a 9% brokerage fee to buy a fund.

Leave a Comment

Join More Than 10,000 Subscribers!

Sign up now and get our free e-Book- Financial Management by the Decade - plus new financial tips and money stories delivered to your inbox every week.