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Cameron Passmore CIM, FMA, FCSI

Portfolio Manager

Benjamin Felix MBA, CFA, CFP

Associate Portfolio Manager
Contact
  • T613.237.5544 x 313
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1

The Bank May Not Be Your Best Bet For Investing

March 24, 2017 - 0 comments

The big Canadian banks have come under fire recently for their aggressive tactics and, in some cases, claims of unlawful behaviour by stressed employees chasing sales targets. Most of the media attention has focused on customers being pushed to increase credit limits and overdraft protection, or apply for a more expensive credit card. But there is another product that banks have been aggressively selling for years while only attracting a bit of attention: High-fee mutual funds.

‘Suitable’ investments

Walking into a bank branch and asking to speak with a financial advisor about investments will likely result in a recommendation to purchase the bank’s high-fee actively managed mutual funds. Asking for low-cost passive index funds might be answered by a slick rebuttal focused on how well the bank’s fund managers have done in the past.

The advisor will generally be licensed to sell mutual funds – a registration that requires them to make suitable recommendations to their clients. A suitable recommendation is permitted to be a better deal for the bank, as long as it matches your risk profile and circumstances. This is true despite the evidence that higher cost actively managed funds, while more profitable for the bank, are likely to underperform lower cost passive index funds over the long-term. You do not want suitable advice.

The friendly financial advisor at your bank is probably not malicious. They’ve been taught that the bank’s funds are excellent. It’s also unlikely that they’re familiar with the large body of academic research discrediting the claim that active fund management adds value over time.

There are other options

Canadians seem to be happy to take suitable investment advice for now – they added $10.9 billion to passive funds and $10 billion to active funds in 2016.  In contrast, Americans added $490 billion to passive funds and removed $326 billion from active funds over the same year. This may be driven by the growth of registered investment advisors in the U.S., who are legally required to act in the best interest of their clients.

There are financial advisors in Canada who are held to this higher standard. A Portfolio Manager is a regulated title in Canada with a legal duty to put the interest of their clients ahead of their own. Similarly, CFA charterholders are held to a code of ethics and standards of professional conduct which require clients’ interests to come first.

Of course, if you want to cut advice out of the equation entirely you can also try your hand at managing your own couch potato portfolio.

Investing in the banks’ mutual funds is more likely to help them post record profits than help you meet your long-term goals, but you will get a much rosier story from their financial advisors. Buyer beware.

By: Ben Felix with 0 comments.
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