The industry is kidding itself, says a seasoned veteran laying out a passionate case against 5 per cent upfront.
An advisor is presenting a case for why 5 per cent upfront is totally unnecessary in today's marketplace.
“Over almost 34 years I have yet to see an example of where it is in a client's best interest to purchase funds on a DSC basis,” Vancouver Raymond James advisor Ross Birney commented on Wealth Professional’s site last week. “The argument that they help to keep clients invested when they might otherwise sell at an inopportune time is ludicrous and merely self-serving.”
Birney’s comments come on the heels of an article recently published highlighting the average client’s objections to moving over to the fee-based model. The reaction on both sides of the argument was fast and furious.
Birney, however, argues that the real elephant in the room isn’t embedded commissions but rather DSC funds, which got their start many years ago as a counter reaction to front-end load funds sold with almost double-digit upfront commissions.
“Way back when mutual funds first came into being there was a front-end load of 9 percent and people actually paid that,” says Birney. “I can’t imagine that myself but [that’s what was happening]. And that’s how DSC funds came into being as people said ‘wait a minute, I don’t think I want to pay that.’”
“So, they created this … product where you’re not paying anything on the front end but now you’re locked into it for a long period of time and you pay the penalty and by the way we’ll still pay your advisor the big upfront commission. Clients don’t need that.”
To illustrate, Birney throws out an example where a client invests $100,000 in DSC mutual funds. He reasons that if the client knew their advisor was being paid $5,000 upfront by the fund company, even though the client pays nothing, they would be stuck in the fund family for five years getting out only by paying a five per cent penalty, he reckons that clients would be furious.
Birney himself charges zero per cent front-end loads, with a one per cent trailer being his only form of compensation.
“There’s a certain amount of service that ought to come with just being a customer,” says Birney. “A one percent commission [trailer] is fair compensation.”
“Over almost 34 years I have yet to see an example of where it is in a client's best interest to purchase funds on a DSC basis,” Vancouver Raymond James advisor Ross Birney commented on Wealth Professional’s site last week. “The argument that they help to keep clients invested when they might otherwise sell at an inopportune time is ludicrous and merely self-serving.”
Birney’s comments come on the heels of an article recently published highlighting the average client’s objections to moving over to the fee-based model. The reaction on both sides of the argument was fast and furious.
Birney, however, argues that the real elephant in the room isn’t embedded commissions but rather DSC funds, which got their start many years ago as a counter reaction to front-end load funds sold with almost double-digit upfront commissions.
“Way back when mutual funds first came into being there was a front-end load of 9 percent and people actually paid that,” says Birney. “I can’t imagine that myself but [that’s what was happening]. And that’s how DSC funds came into being as people said ‘wait a minute, I don’t think I want to pay that.’”
“So, they created this … product where you’re not paying anything on the front end but now you’re locked into it for a long period of time and you pay the penalty and by the way we’ll still pay your advisor the big upfront commission. Clients don’t need that.”
To illustrate, Birney throws out an example where a client invests $100,000 in DSC mutual funds. He reasons that if the client knew their advisor was being paid $5,000 upfront by the fund company, even though the client pays nothing, they would be stuck in the fund family for five years getting out only by paying a five per cent penalty, he reckons that clients would be furious.
Birney himself charges zero per cent front-end loads, with a one per cent trailer being his only form of compensation.
“There’s a certain amount of service that ought to come with just being a customer,” says Birney. “A one percent commission [trailer] is fair compensation.”
