Friday, July 29, 2011
Why Canadian Fund Investors are Confused
Canadian fund owners have every reason to be confused.....and it is likely to be getting worse not better! The average investor often makes the assumption that they just don’t have the time to sort things out, when in fact the industry is ensuring the investor does NOT sort things out. The basic information required by investors is either completely lacking or is provided in a format that cannot or will not be understood by investors.
- Ask why we pay higher fees on Mutual Funds than other countries and you get a resigned shrug of the shoulders. Ask the fund companies and they will assure you 1% and 3% are the same fee really! (Canada ranks last in fund fees on virtually every international study)
- Ask why salespeople who sell funds are called “advisors” and not “salespeople” and you get a shrug. (Industry lobbyists pushed for changes to use other terms in regulatory requirements and the salespeople call themselves "advisors" which means nothing)
- Ask why so many Canadian investors purchase funds on a deferred sales charge basis and you get a funny look, like “what is that?” from the investor who has bought the punitive DSC option of a fund. (check your statement for initials such as DSC, or BEL beside your fund name; some countries just regulate there can be no DSC fees, which solves the problem)
- Ask how much an investor is paying each month, quarter, or year to have their funds managed and the investor shrugs. Even the GST/HST fees are hidden for some reason? (government complicity allows fund firms to hide HST fees so investors cannot calculate their MER fees)
- Ask how a fund can lose money and yet still issue tax slips for dividends, capital gains, and interest supposedly received by the investor, and you get a shrug.
- Ask what the annual rate of return on an investor’s portfolio is and you get a shrug. (funds advertise their performance when it suits them but will not tell you your fund performance....can you guess why?)
- Ask how you’re fund has performed against the relative benchmark for the last month, quarter, year etc, and you will get a shrug. (SPIVA reports consistently show funds perform very poorly against passive index strategies)
- Ask how a balanced fund can be called “balanced” when it rarely is a 50%/50% split between equity and fixed income and almost always holds more equity holdings. Many investors actually believe balanced means “equally balanced”! (International rules define the amount of allowable asset mix in a fund that is balanced)
....as you can see the list of reasons to be confused can be quite high for a typical Canadian trying to invest their RRSP and/or TFSA into something paying more than 0.10% annual interest. Most Canadian investors wrongly blame themselves. Their thought process is that “they must be too busy to understand all the information they get”, or perhaps “they just do not have the interest or aptitude for investing”. In fact, the real reason investors do not comprehend answers to the above concerns is because the information is being withheld by the manufacturers and sales people. That’s right; information is not unknown to the fund firms and sales people. It is simply withheld from the paying client! Apparently we are too “simple” to understand the information or explanations.
In fact the fund industry has a policy of ensuring the language in fund information documents does not exceed the comprehension level of a child in grade six! No, I could not make that up folks! This is official policy! (National Instrument 81-101; Section 4.1 (3) (f) requires the document not to exceed a grade 6 reading level on ...).
So, why do I say it is getting worse? While foreign securities regulators continue to advance the requirements for transparency, Canadian regulators continue to lose ground with newer and dumber approaches to fund disclosures! The next blog will discuss the new “risk” disclosure approach recommended for Canadian funds. It is misguided, misleading, and another fund industry sham supported by what appears to be a totally out of touch and disinterested regulatory body! Here is a clue to how bad this new risk disclosure is.....the same fund manager managing two identical versions of the same fund can have the identical funds ranked at two different risk levels depending on who is sponsoring the fund. Apparently, risk is just a state of mind!