Saturday, May 31, 2008
Fox in the Hen House
Retirement is often a battle between you and your advisor. Can you guess who is winning?
The success you have in preparing for retirement will depend on whether you or your advisor wins control over your investment accounts. Recent studies have made it extremely clear that you will need to grow your savings to supplement your government retirement income. For those fortunate enough to have a defined benefit pension, the battle is for maximum happiness versus a tight budget. For those without a defined benefit pension the battle will be for a reasonable standard of living versus dependency on others.
For many investors, they believe they have acted prudently, hired an advisor who will assist them, and worked diligently to save their money. Many will realize far too late that the fox is in the henhouse!
While there are a growing number of advisors who put the client first, the overall trend is still very disappointing. Most advisors put themselves first, their employer second and the client third. What proof do I have for such a bold statement? Recently there have been a number of surveys completed by reliable sources that suggest the industry in Canada charges the highest Mutual Fund expense ratios (MER) in the industrialized world. In fact, Alia McMullen in the Financial Post on Friday May 30th, does a good job of outlining the issues. Her articles is supported by the Rotman International Centre for Pension Management which has raised the alarm that MER’s may rob Canadians of the ability to fund their retirement years.
The issue of excessive MERs have been addressed ad nauseum in Canada but with little tangible results. So advisors work for companies that charge high MERs , what can they do you may ask yourself? Well, for starters they can reduce the damage instead of compounding the matter. However many put themselves first and sell products with the highest fees they can get when cheaper options would benefit the client. The sale of expensive deferred sales charge (DSC) funds makes the problem worse for investors but makes the advisor wealthier. The question I have yet to hear an answer to is “how does the investor benefit from purchasing expensive DSC style funds”. The obvious answer seems to be that they benefit by having a very, very happy advisor and fund company. There appears to be no tangible benefit to the client. I realize the advisor needs to earn a living, but not at the expense of the client.
The product selection between Canada and the U.S. shows how a closed shop in Canada allows for the sale of substantially more DSC funds in Canada versus the comparable U.S. per centage. Instead, Americans purchase a much higher percentage of Index funds. Would it surprise you to know Canadian advisors also have access to the same options but consistently choose higher cost alternatives?
What can you do? Have a strongly worded conversation with your advisor about any funds sold to you via the DSC option. Ask how you benefit by being locked into one specific family of funds by penalties outlined in the DSC schedule? Then ask the advisor how he/she was compensated and if it differs with the DSC versus say a front end loaded fund. The smart investor hires an advisor to work "for you" NOT "with you". You can hire better friends cheaper so do not be fooled into thinking you are part of a team approach. It all starts and ends with your money!
Watching your retirement slip away......