FAIR Canada came across this Press Release issued by Investors Aid Co-operative of Canada on March 31, 2009 and thought we would pass along to our readers.  We welcome your comments.

New consumer co-operative warns against deferred sales charge mutual funds

Millions of Canadians use them and the investment industry loves to sell them, but deferred sales charge funds hide a nasty secret if you try to sell.

With layoffs looming and your mutual fund down -60%, you decide it’s time to cash out.

Then more bad news. On top of the big loss, you face redemption fees of up to 15%.  

Few consumers know that redemption fees are charged on the original amount invested, not the current market value. The math is brutally simple. If you invested $10,000 in the past year and it declined to a value of $4000, the redemption fee of 6% of $10,000 equals $600 or 15% of your remaining capital.

After the financial meltdown, analysis shows 59 mutual funds are down more than 60%; 299 funds lost 50% or more; 554 funds lost 45%; and 1011 funds lost 40% or more; all this in just the past year.  (Source: www.globefund.com to October 31, 2008)

“Deferred  sales charge funds have never been good for consumers,” says Investors-Aid Co-operative of Canada, Executive Director Garth Rustand. “They can be very expensive, lack transparency, and encourage trading. But after this year’s historic declines, redemption fees like this are clearly excessive.”

Investors-Aid is Canada’s only consumer co-operative for investors and is attracting a steady stream of new members looking for lower costs and objective consumer information.

The best options for mutual fund investors are front-end load funds at zero commission up front. These have no redemption charges and usually carry lower management fees.

“Advisors may try to charge you commission on these funds, but politely decline. They are very optional.”

Research shows Canadians pay the world’s highest mutual fund management fees and the highest commissions. (Mutual Fund Fees around the World, Harvard Business School, 2006)

 The Co-operative is preparing a brief on behalf of consumers for the Investment Funds Institute of Canada and Mutual Fund Dealers Association. As a first step changes will be proposed to allow redemption fees to be waived in emergency situations. “