THE BLOG

The Difference Between a Mutual Fund and a Seatbelt

01/28/2014 05:28 EST | Updated 03/30/2014 05:59 EDT

When I was growing up, we didn't have seatbelts in our car. I remember going on long road trips and moving around in the car. While my father would drive through the night, I slept on the ledge in the back window while my brother and sister would sleep on the back seat. Mom would usually have the youngest child on her lap or in the front seat between her and dad. It was comfortable, but obviously not safe.

After untold numbers of preventable deaths, the government finally passed legislation making it mandatory for car manufacturers to install seatbelts and to enforce consumer's to use them. Currently, all provinces and territories in Canada have mandatory seatbelt legislation with Ontario being the first (1976) and the Yukon being the last (1991). Although the enforcement of seatbelt laws is left up to the provinces and territories, it was the federal government that mandated the manufacturers to install them in the first place.

In Canada, we leave securities and investment enforcement up to the provinces and territories through the various Securities Commissions. There is no National regulation in place, but the Federal Government does have control over the manufacturing and distribution of financial products.

I'd have to concede that mutual funds are going away, but what I think should be banned (if not imbedded commission) is the Deferred Sales Charge (DCS). The elimination of Deferred Sales Charges can only be mandated by the Federal Government but would then be enforced by the provinces and territories.

Like seatbelts, when it comes to public safety, the Federal Government can intervene.

So why not put a ban on Deferred Sales Charges? Quite simply, it's an issue of public safety. There is nothing beneficial to the consumer about a DSC. As a matter of fact, it's nothing more then a legalized trap created by companies that produce and market mutual (and segregated) funds. Each year, millions of people are having their financial futures killed because of Deferred Sales Charges.

Fifty years ago, automobile manufactures had the choice to install seatbelts or not. Many chose not to. It was only when they were forced to do so that they complied, even when they knew that seatbelts saved lives.

When Deferred Sales Charges were first built into funds, there was less information available to consumers as they had no way to compare one company to another. Only the most sophisticated investors had any hope in comparing one fund to another, let alone one company to another. There was no internet, no information in the newspaper, nothing readily available to the general public.

So basically, people who invested in a Deferred Sales Charge investment never moved their money from one company to another because they had no idea how they were doing and nothing to compare it to.

Today investors can compare various investments in real time. If a company is not doing a good job investing your money you should have the right to move that money without penalty. To me, that's not only fair and ethical but it should be someone's legal right to do so.

Over my career I've interviewed thousands of people who own mutual and segregated funds that have Deferred Sales Charges. I can't think of one person who owned them that could explain to me exactly what that was and what benefit it is to them. They really have no idea.

Like their counterparts in the automobile industry, manufactures of investment funds have to change (either voluntarily or forcefully) when they know that they're dong something that isn't in the public's best interest. And our Federal Government has to be brave enough to step in when they know something should be done to protect public safety.

It is pretty clear that Deferred Sales Charges are killing investor's future and it's time for them to be illegal.