The retail investment business shouldn’t cry because deferred sales charges (DSCs) are over, but be glad they existed at all — and be motivated by their passing to create the next big thing.
With Ontario planning to join the rest of the Canadian Securities Administrators (CSA) in banning fund companies from paying upfront sales commissions to dealers, the DSC fund structure will effectively end on June 1 next year.
The fact that the ban now includes Ontario will be a relief to those who feared the compliance headaches of grappling with two regimes.
However, long-standing defenders of the DSC structure will be disappointed. While there was plenty of self-interest behind the arguments for keeping DSCs, the claim that they remain necessary to ensure access to investing and advice for smaller clients was the only compelling justification for their preservation.
In their day, DSCs accomplished what many fintechs aim for today — they eliminated the friction that prevented consumers from becoming investors.
By doing away with large upfront commissions that immediately undermined the basic goal of saving and investing, DSCs helped clear the path for many people to become long-term investors. In the process, they turned the fund industry from a bit player into a behemoth.
But as the Ontario Securities Commission rightly points out, there are now numerous alternatives for small clients, with robo-advisors and portfolio ETFs joining traditional discount brokers and no-load funds as cheap options for any investor.
What’s still missing is cost-effective, independent, reliable advice for clients of all sizes. That’s an area crying out for an innovation as revolutionary as the DSC was back in the late ’80s. Too often, what now passes as “innovative” is little more than recycling and repackaging, or unearthing new forms of regulatory arbitrage.
While DSCs have outlived their usefulness, they did plenty of good for investors and the industry. The challenge posed by their demise is for the industry to devise a revolutionary new way to serve clients.