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Corsica, or Refl ections Save 50% Lloyd/Flanders Resort Lounge Group Save 60% OFF Ow Lee Classic Dining 60% OFF Lloyd/Flanders MonacoDeep Seat Grouping Save 60% OFF Lloyd/ Flanders Na pa Lounge Group Save 60% OFF w w w .in si d eH A LT O N .c o m O A K V IL LE B E A V E R T h u rs d ay , A u g u st 4 , 2 01 1 1 4 Mutual fund research con-ducted over the years has shown that not only do investors not understand mutual fund charges, but many are com- pletely unaware they are being charged a fee in the first place. It is important that investors understand the mutual fund fee options so they are in a better position to decide which is best for their situation. Since many investors are unaware of mutual fund fees, we will cover the basics of purchase options. When you purchase a mutual fund from an investment advisor or financial planner, they will most often receive a sales com- mission. The most popular method is based on a Deferred Sales Charge (DSC). The DSC commission com- monly paid is five per cent. fSo if you purchased $10,000 o a mutual fund under the DSC option, the commission paid to your advisor is $500. Note that this is paid by the fund c o m p a n y, so your full $10,000 is invested. This differs from a front-end fee where the commission, nego- tiated with your advisor, is paid by you and the remainder of your deposit gets invested. There are several implications to the DSC option. Understanding what they are can make you a more informed investor. More informed investors are more likely to make better investment decisions. When you accept the DSC option, you agree that if you with- draw your funds from that fund company, you will pay a penalty fee if your DSC schedule has not matured. Starting around five percent this fee declines slowly to zero after about seven years. So if you take your money from that fund company within the penalty peri- od you will pay the fee applicable at that time. It is important to note that every deposit has its own DSC schedule. So if you contribute on a monthly basis, you will have maturities covering many differ- ent dates. The DSC sales charge option has been the most used method for paying an advisor a sales com- mission; particularly through the 80s and 90s. Yet over the years, circum- stances have changed while the fee structure has remained essen- tially the same. There is a potential conflict of interest between the investor and the investment advisor. If there is not a conflict of interest then there most certainly is the perception of a conflict of interest. The rationale supporting the DSC commission is that you will hold the fund for a long time, being less likely to sell in turbu- lent markets. That com- mission paid up front will cover i n v e s t m e n t advice for the coming years. That raises two issues. Is it your intent to pay a large up-front commission to compen- sate your advisor for an unknown amount of service over the com- ing years? How many other services do you pay for up front in this man- ner? The second issue has to do with the investment logic. Will your circumstances change over the next seven years? Will you want to sell before the DSC period expires? Does that fund company have f other offerings which would be o interest to you? What happens if your mutual fund manager changes firms? Will you want to sell the fund at their previous firm so you can fol- low them to the new firm? If you do decide to leave that fund company you will pay that penalty fee. At one time, DSC fees were an innovative way to allow investors to purchase mutual funds with- out directly paying a sales com- mission. f However, now the world o mutual fund management has changed. Mutual fund transactions now are larger, faster and administra- tively less complicated. The DSC option may no longer be suitable. Discuss this topic with your advisor. The DSC option lacks flexibil- ity and you may be better off to avoid it. Submitted by Peter Watson, MBA, CFP, R.F.P., CIM, FCSI. In 1991, Peter founded Peter Watson Investments in Oakville. Peter can be reached at 905-842-2100 or visit the website at www.peter- watsoninvestments. d d l f d d h fInvestors must un erstan mutua un s an t e ees Dollars & Sense By Peter Watson Speak up! You can comment on any story in today's Oakville Beaver at oakvillebeaver.com