Mutual Funds: DSCs & MERs

Mutual funds remain good investment vehicles when used appropriately.
Generally, I recommend diversified fund portfolios, with individual bonds in accounts less than $300,000 or when clients prefer less involvement in the investment decisions.
Above that threshold, a properly diversified stock portfolio is recommended with complimentary international mandate mutual funds for diversification and efficiency.
Slowly, management fees have been decreasing. However, most companies still support Deferred Sales Charge (DSC) structures that pay the advisor an up-front 5% commission (with ongoing annual maintenance compensation) and lock the client into the fund family for periods of 3 to 7 years. The upfront commission is funded by early redemption fees (ranging from 6% in the first year to 0 in the 7th year) as well as by the ongoing expenses of the fund. This expense keeps upward pressure on fund Management Expense Ratios(MERs).
I believe this structure is detrimental to clients;

a) it adds to mutual fund costs - keeping MERs higher than need be
b) it provides little incentive for on going portfolio maintenance after the initial sale, and
c) it is illiquid, constraining investment decisions with the early redemption penalties (ie: the Deferred Sales Charge)

There is some flexibility, as most companies allow a 10% annual penalty free redemption, as well as the ability to switch into other funds within the family. This does not protect clients in the event of material changes in the fund company/management! For smaller mutual fund accounts, my practice utilizes front-end mutual funds. Larger accounts get access to fee class (F-Class) funds (low MERs due to removal of advisor compensation) so that the client may benefit from deductibility of management fees.
 
Are DSC's good for your portfolio? Call me to discuss.