The Genesis of DSC Mutual Funds

DSC – stands for Deferred Sales Charge (and is also sometimes referred to as Declining Sales Charge). For more information on the different types of loads a mutual fund can have, click here.

Ken Kivenko, investor advocate and author of the fantastic website CanadianFundWatch.com sent me this article on the history of the DSC fund. I thought it would be worthwhile to the readers of this blog so I asked Ken for his permission to reproduce it. Take it away Ken….

The DSC was an innovation of Mackenzie Financial back in 1987 with the launch of the Industrial Horizon Fund. It was a brilliant marketing move by Jim O’Donnell, founder of Mackenzie. At the time, the load funds were the only serious contenders in the market, and all were sold by front-end load. Most had a load of 9% that declined based on the amount invested. If you had $10,000 to invest in 1986, you would have to be a very lucrative or lucky client to negotiate that down to 5%. Given that scenario, to sell DSC funds proved to be very easy. Supposedly everybody wins! The client pays no direct or visible sales commission if they hold the fund for seven years or so, and the mutual fund sales person gets paid upfront for their services by the fund Company.

Another simultaneous innovation, the trailer fee involved a 0.5 % p.a. (per annum) payment to salespersons as long as investors held the units. Thus, salespeople had a 5% upfront payment and about 0.5%x 6 years =3% payment over the DSC period ( and beyond ) and the excellent prospect of dramatically increased sales.

In 1987, mutual fund sales took off as unsuspecting investors poured in money.

To pay for the upfront commission to the advisors, the fund companies increased the MER, which of course is passed on to the fund thus lessening your return and adding liquidity issues. If there had been an Investor Advisory panel at the time, they would have undoubtedly counselled then OSC Chairman Stanley Beck not to approve the new sales tactic. Like the old industry adage says, Mutual funds are sold not bought.

(Preet’s note: Ken wanted to acknowledge and give credit that Mr. Beck now is on the board of directors for FAIR Canada – Canadian Foundation for the Advancement of Investor Rights Canada – and he supports Investment Advisory Committees.)

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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