Investments & Deferred Sales Charges - What are they anyway?

Doing your due diligence with purchasing investments is a must!  Know what you are signing up for, before it becomes an issue.

Things such as "deferred sales charges" or DSC's can sometimes lure financial advisors to place you in those funds as they get paid more $$.  Also, the client is forced to stay within the fund for a set term period (usually between 5 and 7 years), so this typically keeps the client with the advisor for a longer period (this is good if you are happy with the person, but not so if you are dissatisfied).

If you are bad with $$ and want someone to police where and when you remove the $$ then the incentive to not pay a penalty may help you leave the money alone...otherwise it can tie up your funds if you have an emergency or would otherwise like to move your money elsewhere.

Think about it, most people would like to have control of their money.  Being as liquid as possible can be a good thing.  You never know what life has in store for you (i.e. illness, job loss, etc).  Also, what if the funds you have invested in start to nose dive, would you not want to move your $$ so as not to lose any more than what is already gone? 

Don't get me wrong, you can move funds that are in a DSC account, but they charge you, and it is BIG.  Typically it is a sliding scale...year one 5 to 6%, year two 5 to 4% down to year 5 at 1%, but this is still $$ that comes out of your profit (if there even is one). 

In essence, you are putting your money in the hands of the fund manager and trusting that in the next 5 to 7 years they are watching it and making sure that all is well.

What I worry about is that who EVER has met a fund manager personally?  Most of the time we meet our financial advisor, but never the person that is physically calling the shots on the funds you are invested in.  This is a really scary thought when you consider that if you invest with "conditions on the investment" you may end up taking a larger loss than expected (because of penalties). 

I guess the best thing to do is to ask your advisor the particulars of the funds you are getting into and if they have deferred sales charges.  Advisors have to get paid somehow, but the question is, how do you want to pay them, when you really need the $$ and are forced to pay a penalty to do so, or on the front side.  I think this should be a conversation that is more frequent with clients and financial planners than it currently is.

What you know, may save you hundreds if not thousands of $$.

Knowledge is power.

Until the next post,

Liz