November is financial literacy month in Canada. At the core of financial literacy is developing an awareness of sensible budgeting, saving, insurance and investment practices. Cut The Crap Investing will certainly provide posts on those topics this month. But awareness will also mean knowing how to spot a shady sales pitch.
The following is re-posted with permission of Ken Kivenko of Kenmar Associates. Ken works tirelessly as an investor advocate. You can read of Ken’s great work in this Globe and Mail article that frames how Ken is a relentless fighter for investor rights.
Here’s a Q&A with Ken on myownadvisor.
I subscribe to Ken’s email alerts. I just knew this would make a great post. Ken was happy to allow me to share this with readers. I was certainly anxious to share this with readers.
Investor ALERT- Street level financial literacy
November is financial literacy month in Canada. The regulators and industry folks will run articles on diversification, asset allocation and the like. We believe financial competency also involves being able to spot a shady sales pitch. We present some of the most popular deceptions used by Bay Street to get your money.
“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor – the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”—William Bernstein
“My advice is free, the fund company pays me.” Sounds like a great deal, eh? Of course the truth is that the mutual fund includes a charge for them to provide cash to dealers who sell their mutual funds. There is no free lunch here, just deception.
“No need to go to the Ombudsman for Banking Services and Investments. We have our own ombudsman.” The banks certainly do have an internal ombudsman except it is not independent of the bank. If you have a complaint and want an independent review, send it to OBSI if you are unhappy with the dealer’s response.
“Welcome to our free educational seminar.” Investor advocates consider these dinners as a sales pitch trying to get your money. Any education you get is incidental to the sales pitch. Such “free lunch seminars” can prove to be very costly.
“With this DSC fund you don’t pay any commission upfront. All of your investment goes to work for you right away.” When you buy a DSC fund you are locked in for 6 or 7 years during which you need to pay a redemption penalty if you want to sell your fund. DSC funds pay the dealer 5% commission as soon as you buy the fund. There could be a little self-interest involved here, no?
“Trust me, I have a [title]” There’s so much title confusion in the industry, and it’s a confusion that unscrupulous “advisors “often take advantage of. They are free to call themselves pretty much anything: advisor, counselor, wealth manager”. Most “advisors” are actually registered as dealing representative i.e. salesperson.
“I recommend you should get out of that mutual fund and into this one” Why? If past performance doesn’t predict future returns, why are you being told to move to a fund with stellar past performance? If your salesperson had the ability to pick outperforming mutual funds (and she doesn’t), how did she make a mistake with the fund you’re currently invested in? Investors who jump in and out of funds chasing the next hot fund manager end up getting lower returns than those who stay invested in a globally diversified portfolio of low cost stock and bond index funds/ ETF’s .
“This fund gets a 5 star rating and has been top quartile for over a decade”. Even if all of that is true (sometimes it isn’t), investors still need to understand that past performance does not persist and should not be relied upon. Most active managers lag their benchmarks and the few that don’t cannot be reliably identified in advance. If they could, everyone would be fully invested in the same (winning) funds. Academics say you need AT LEAST 25 years of data to be confident that (out)performance is due to skill; not luck.
“It doesn’t matter what you pay, it’s what you get after costs that matters”. That’s like saying buying lottery tickets is sensible… provided that you only buy tickets that have the winning numbers. Logically consistent. Impossible to do in a practical way. Empirical research shows that costs are the best predictor of returns. Costs count.
Thanks to Ken for this great post. Yup, it’s buyer beware. But you can’t ‘beware’ unless you are aware. And Ken suggests that you make yourself aware of the fees that you currently pay as well.
You can use this mutual fund fee calculator on getsmarteraboutmoney.ca. With that tool you can compare fund performance. That is a great site. That sight alone can do a lot of they heavy lifting with respect to increasing your financial literacy.
I would also suggest that you check out your T-Rex score on larrybates.ca.
You’ll discover how fees can eat into your returns. Fees are wealth destroyers.
On the subject of financial literacy you should certainly have a read of Larry’s book. Beat The Bank, The Canadian Guide To Simply Successful Investing follows the theme of Ken’s post and those high-fee mutual fund sales sharks.
Thanks for reading. Want to submit an article for financial literacy month? You can reach me via that contact tab.