Reading the stories this week about the aggressive sales tactics of bank employees, I was reminded of a quote in William Bernstein's book, The Investor's Manifesto:
"Who can you trust? Almost no one. … You are engaged in a life-and-death struggle with the financial services industry. Every dollar in fees, expenses and spreads you pay them comes directly out of your pocket."
For many Canadians, the local bank branch is the first place they go for investing "advice." Typically, they're met by a smiling, well-dressed man or woman who recommends the bank's own mutual funds. The pitch may include slick charts and tables – all of which go by in a blur – followed by instructions to sign here, here and here.
Thus begins a relationship that will be very profitable for the bank. The customer? Not so much.
The purpose of today's column isn't to malign bank employees who – as the recent revelations make clear – are under enormous pressure to bring in revenue. Nor do I want to suggest that every financial professional engages in unethical conduct; there are many honest advisers who charge reasonable fees and are able to earn a good living while also looking after their clients' interests.
Rather, my goal is to arm investors with the healthy skepticism required to navigate the investing industry. Whether you're dealing with a bank, broker or other financial institution, there are several things the friendly employee in the suit may not be telling you.
I'm actually a salesperson
Their business cards may have a fancy title such as "investment adviser," "financial planner" or "wealth adviser," but the vast majority of people working on the front lines of the investment industry are really just salespersons. "These people are not legally required to place the interests of the investor ahead of those of their dealer," the Small Investor Protection Association warns on its website. There are exceptions – portfolio managers and individuals holding the chartered financial analyst (CFA) designation, for example, are generally held to a higher "fiduciary" standard – but for others all that's required is that products they sell are "suitable" – a term open to interpretation and potential abuse.
My fees hurt more than you think
A typical bank mutual fund charges about 2 per cent annually in costs, as measured by the fund's management expense ratio (MER). No big deal, right? Wrong. If the market returns 8 per cent annually, the investor would make 6 per cent (before taxes). At that rate an initial investment of $200,000 would grow to $641,427 after 20 years. But if the investor were to instead purchase an exchange-traded fund with an MER of 0.5 per cent, the $200,000 would grow to $849,570 – a difference of $208,143. Because of compounding, even a small difference in fees – in this case just 1.5 percentage points – can have an enormous impact on long-term returns. Advisers are counting on you not to look at the big picture.
You can probably do this yourself
You wouldn't perform surgery on yourself or rebuild the transmission on your car, would you? So what makes you think you can manage your own investments? You've probably heard this specious argument before, but the truth is that investing doesn't have to be complicated; it can be as simple as buying a few low-cost index mutual funds or ETFs and reinvesting your dividends. Yes, there will be times when a financial expert is required – say for tax, retirement or estate-planning advice – but with the investing information available in books, websites and newspapers, managing a simple portfolio is well within the ability of most people who are prepared to do some homework.
Your guilt works to my advantage
Clients are often reluctant to challenge the financial advice they're given, because they don't want to rock the boat. "He's a really nice guy. I don't want to upset him," I've heard people say. Even when it's clear that the relationship is not serving the client's interests, people often can't bring themselves to leave their adviser – especially if he or she is a friend, relative or someone with whom they've worked for many years. It's normal not to want to hurt someone's feelings, but guilt is no reason to stick with an adviser – or a dentist, hairdresser, or any other service provider with whom you are not satisfied.
I have (self-serving) responses to all of your concerns
Interested in low-cost ETFs? "ETFs aren't very liquid and they won't protect you in a downturn." What about index mutual funds? "Returns from index funds are not as good as returns from actively managed mutual funds." Is there something I can buy with lower fees? "It's not the fees that matter, it's the return after fees." These are some comments from advisers that readers have passed along to me over the years. Some are outright lies; others are obfuscations. The fact is that advisers know how to counter every concern or objection you might have in order to keep the relationship going and protect their revenue stream.
With investing, knowledge is power. If you bury your head in the sand and place all of your trust in a commissioned salesperson, your results will suffer dramatically. I guarantee it. The best investment you can make – before you step into a bank branch or put a penny into any financial product – is to educate yourself.