Consumer Bulletin: Take care when considering mutual funds with DSCs

Posted On Thursday May 06, 2021

Last updated: Monday May 10, 2021

Deferred sales charges (DSCs) are fees that mutual fund investors pay to the mutual fund company if they sell the mutual fund within a certain time after purchasing it. All mutual funds have fees and there are many ways that these fees can be structured. Not all mutual funds have DSCs, but many do. The amount the investor must pay when they sell a mutual fund with DSCs declines over time and typically reaches zero after five to seven years. This is an example of a DSC payment schedule:

When you sell units of your mutual fund

You pay a charge of:

During the 1st year


During the 2nd year


During the 3rd year


During the 4th year


During the 5th year


During the 6th year


More than 6 years after buying


Investors that sell their DSC funds before the fee schedule reaches zero could pay thousands of dollars in fees, depending on how many DSC fund units they sell and how much time remains on the schedule for each fund.

Fees matter

Investment firms and advisors provide important services that many Canadians rely on for their financial wellbeing, and they receive payment for the advice that they provide. Sometimes fees are paid by investors directly, and sometimes indirectly. The amount of fees that an investor pays reduces an investment’s return.

Are DSC mutual funds right for you?

If you are thinking about adding DSC mutual funds to your investment portfolio, there are some things you should consider first.

They may be a source of conflict between your interests and your advisor’s

DSC funds have long been criticized for creating a conflict of interest between investors and their advisors. DSC funds have attractive commissions for the advisors who sell them, which has led investor advocacy groups to argue that this leads advisors to be biased toward recommending DSC products, even if they may not be suitable for their clients. For years, advocates have lobbied regulators to ban mutual funds with DSCs.

Advisors and firms, however, have argued that there is a place for DSC funds because they offer the benefit to investors of no upfront fees in exchange for holding the funds over a longer time. Firms and advisors observe that this gives smaller investors access to professional advice they couldn’t otherwise afford and is important for maintaining a healthy industry where smaller firms can compete with larger firms. 

When we investigate consumer complaints related to DSCs, we consider whether:

  • it was suitable for the consumer to purchase a mutual fund with DSCs. Generally, DSC funds are not suitable for consumers who may need to sell their mutual funds before the end of the DSC payment schedule.
  • the investment advisor and/or firm disclosed and explained the fees to the consumer at the time of purchase.
  • where applicable, the investment advisor and/or firm, disclosed and explained the DSCs when the consumer planned to sell the mutual funds.

If the firm has not met these requirements and an investor has lost money as a result, we generally recommend compensation.

DSCs may not be suitable for you
Like all investment products, mutual funds with DSCs may be suitable for some investors and not others.

DSC funds may be suitable for investors that:

  • will not need to access the money in their investment for at least the term of the fee schedule, regardless of changes to the market.
  • want to invest toward a long-term goal like retirement and are comfortable locking funds for at least the length of the redemption schedule.
  • prefer to receive investment advice with no upfront fees and understand that this arrangement is in exchange for not selling their investments for a number of years after purchasing them.

DSC funds are usually not suitable for investors that:

  • need regular investment income that will require them to sell their investments over time, for example to pay living expenses in retirement, or expenses related to illness or assisting family members financially.
  • may need to sell funds in a RIF account to comply with mandatory withdrawal requirements.
  • will need money to make a significant purchase, such as a car, home renovation or down-payment on a property.
  • cannot commit to owning a mutual fund for at least as long as the redemption schedule.
  • prefer other ways of paying for the investment advice they receive.
  • prefer short-term investments that can be sold without high penalty fees for selling “early.”

DSCs will be banned in Canada in 2022
In 2018, the Canadian Securities Administrators (CSA) published a report to summarize the public feedback they received about mutual fund fee structures in Canada, and to examine and address key issues. Among the policy changes proposed was a discontinuation of mutual funds with DSCs. As part of their consultation process, the CSA considered and presented evidence-based research as well as the feedback they received from consumers and industry participants.

In February 2020, all provinces and territories, except Ontario, announced their decision to ban DSCs. The CSA explained that the decision was motivated by investor protection concerns. Key concerns were that the locked-in feature of DSC funds and conflicts of interests associated with the model harm investors, especially those who are financially vulnerable. The Ontario Securities Commission (OSC) joined the ban on May 7, 2021, harmonizing the DSC ban across Canada.

The ban takes effect on June 1, 2022. Until then, the sale of DSC funds may continue across Canada and the redemption schedules of funds already sold will be allowed to reach zero.

OBSI case studies

Below, we provide two examples of OBSI cases involving investors who complained to us about incurring high DSCs on their investments. We recommended compensation in one case and not the other.

Case Study #1 - No recommendation for compensation where DSC funds suitable for the investor

Consumer chooses new firm
Ms. U transferred her investments to a new firm. During a meeting with her new advisor, Ms. U said she was planning to save for retirement over the next 20 years, and her advisor recommended some DSC mutual funds. Over the following months, Ms. U authorized the purchase of more DSC funds and her advisor routinely explained the applicable fees before purchasing them.

A year later, Ms. U wanted to sell her DSC funds to invest the money with another firm. By this time, she held several DSC funds in her portfolio. Ms. U’s advisor attempted to contact Ms. U to explain the fee implications. The advisor also wanted to tell Ms. U that if she transferred her DSC funds without selling them, she could avoid thousands of dollars in fees. But Ms. U did not consult her advisor prior to selling. When Ms. U sold her DSC funds, she incurred $15,300 in fees.

Firm reviews consumer’s complaint
Ms. U complained about the $15,300 in DSCs and requested reimbursement from the firm. She told the firm that her advisor had not explained how DSC funds work nor disclosed the fees to her. Ms. U also told them that her advisor had tried to intimidate her into transferring her DSC funds without selling them. The firm reviewed Ms. U’s complaint and could find no evidence to support her claims. Unsatisfied, Ms. U brought her complaint to OBSI.

No basis for compensation
During our investigation, we reviewed the firm’s documentation in Ms. U’s file and confirmed that:

  • DSC funds were not unsuitable for Ms. U because she had a long-term investing time horizon and no imminent need for the funds.
  • Ms. U’s advisor had disclosed the DSCs every time Ms. U purchased a new DSC fund.
  • Ms. U’s advisor recommended a combination of DSC funds and non-DSC funds to ensure that, if necessary, Ms. U could sell some of her investments without charge.
  • on numerous occasions, Ms. U’s advisor and the firm had tried to contact Ms. U to disclose the fees that would apply if she sold her DSC funds before the fee schedule reached zero.

Based on our findings, we had no basis to recommend that the firm compensate Ms. U.

Case Study #2 - OBSI recommends compensation where DSCs unsuitable and advice inadequate

Consumer gets new advisor
Mr. G was an experienced investor and had been with his investment firm for over 30 years. When his advisor retired and the firm provided him with a new advisor, Mr. G noticed changes to how his portfolio was being managed. Sometimes, he felt his new advisor did not keep him fully informed. Dissatisfied with his advisor’s service, Mr. G sold some investments and transferred the money to his bank.

Four years later, Mr. G’s advisor told Mr. G that his portfolio was now too small for the firm to handle, so Mr. G sold the rest of his funds and invested the money with another firm. But, at the time of the sale, Mr. G incurred nearly $3,000 in DSCs.

Firm refuses compensation
Mr. G complained about the DSCs. He did not understand why he was paying fees on investments that he felt had reached maturity and should be paid back to him in full. Based on its investigation, the firm determined that:

  • Mr. G had experience with DSC funds and should be familiar with how DSCs worked, and the fees associated with them.
  • Mr. G preferred the DSC option because he benefited from paying a lower commission upfront, and because his advisor had not been charging management fees on these funds, the DSCs Mr. G had incurred were appropriate.
  • The DSC fees were disclosed on Mr. G’s statements and he should have been aware of them.

The firm concluded that the facts did not support Mr. G’s request for reimbursement, so Mr. G came to OBSI for help.

We recommend compensation
During our investigation, we found that:

  • Mr. G was an older investor, and the long-term DSC investment horizon of the DSC funds was unsuitable for his personal circumstances.
  • When telling Mr. G that his account was too small for the firm, there was no evidence that the advisor had cautioned Mr. G that 1.5 years remained on the fee schedule.
  • Because Mr. G had no immediate need to sell his DSC funds, it is likely that he would have waited to sell them and not incurred DSCs, if he had been aware of the fee schedule.

Based on these findings, we recommended that the firm compensate Mr. G for the full amount of the DSCs. The firm agreed and Mr. G accepted their offer.

What to do before making an investment decision

  • Investment advisors provide valuable services and receive payment for the advice that they provide to you. Make sure you understand how your advisor is getting paid and the fees that apply to your investments.
  • Discuss your investment strategy and the fees you will pay with your advisor to determine which products are right for your portfolio.
  • Make sure to always understand an investment product before you agree to invest in it – your advisor should be pleased to answer any questions you may have.

Related case study
High risk investments suitable for this senior investor, but DSCs unsuitable

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