Looking for your reponses

My new blog at Moneyville doesn’t allow comments yet. And I miss getting comments. It’s not the same if I’m not hearing from readers.

So, here are some things I know will provoke some reaction. Let’s get started.

— TD Bank changing its mortgages to make it harder for customers to switch.
Steve Garganis, a mortgage broker, told me about his blog post that TD is planning to start registering all mortgages as collateral charges on Oct. 18. He calls it putting handcuffs on the client.

A collateral mortgage is NOT portable, meaning you cannot transfer to another institution. You will lose some leverage to negotiate the rate when your mortgage matures.

You can read more in the Canadian Mortgage Trends blog, which says there’s some appeal for consumers who want to refinance.

Effectively, collateral charges allow lenders to change the interest rate and/or loan more money to qualified borrowers after closing, without involving a lawyer. That saves the borrower legal costs if he/she needs to withdraw equity from their home.

But the downside comes at maturity, since TD customers will now have to pay legal fees to switch lenders.

For now, it’s difficult to assess the impact of this change. Everyone needs to renew, but not everyone needs to refinance. So TD’s move will benefit some while hurting others.

James Daw of the Toronto Star writes about TD’s mortgage move here.

— Deferred sales charges on mutual funds can hurt customers.
I believe that many mutual fund buyers don’t like paying sales charges up front. But they don’t understand the severe financial consequences arising from redemptions in the early years.

Even the Mutual Fund Dealers Association of Canada, the industry regulator, knows there’s a problem. It’s proposing new disclosure rules because many consumers complain about nasty surprises when they redeem.

The current rule requires that clients get trade confirmations only AFTER the transaction is executed, the MFDA says.

There is currently no express requirement under MFDA Rules to inform clients at the time of a transaction of fees and charges that will be incurred by the client and deducted from client funds as a result of the transaction.

To make informed decisions, clients require information in respect of transaction fees and charges prior to the acceptance of their order.

Gary B. Gorr, a licensed mutual fund broker, didn’t like my advice to buy only funds with no loads or a front load option. He wrote a rebuttal at his blog.

His argument involves a number-crunching exercise, where he finds a big difference in favour of the deferred sales charge over 20 years.

Having done the math of upfront versus DSC it is never better for long-term investors to pay an upfront sales charge.

Maybe so, but I don’t know many investors who hold the same fund — or stay with the same fund family — for 20 years. Many don’t even stay for the six or seven years needed to eliminate the DSC.

I think deferred sales charges create more problems than they resolve. Too many people are trapped in bad funds or poorly diversified fund families becuase of restrictive exit fees.

And if fund buyers really understood the financial harm they could be incurring by taking on such restrictions, they would willingly choose the no-load or front-load option.

Author: Ellen Roseman

Consumer advocate and personal finance author and instructor.