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) 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!

Sois mike

Saturday, July 9, 2011


Is the Truth Good Enough? I think not!

One of the great challenges for all investors (and especially DIY investors) is determining what information you should accept as truthful and valid. All information is provided from a specific perspective by the source of the information. This blog is no exception!
The easiest part of the process may be determining if information is factually true. If I say “the ETF symbol XIU is a broad based Canadian Equity fund with a MER of 0.17%”, you can determine if that is true quite easily by checking the iShares site or better yet, by reading the prospectus for XIU. Of course, other information can be more challenging to validate. If I stated “the XIU was the most liquid Canadian Equity ETF” or “the lowest cost EFT”, that would require you to do a little more research (it is not the lowest cost but is arguably the most liquid Canadian Equity ETF based upon the liquidity of the underlying securities and daily trade volumes).

OK, if we assume you accept my comments on XIU as being accurate; you then need to ask yourself “why would I believe this blog or any argument it may present with respect to the information provided?” It may be that you have validated the accuracy of previous blogs or it may be that you have checked for confirmation from another source you trust. The important thing is that you do not just assume the information is correct or the correct information is being presented in a proper context. For example, if I stated “you should always buy XIU for your portfolio because it is the most liquid Canadian Equity ETF” then I am using accurate liquidity information to support an improper suggestion. Strong liquidity is not a compelling argument on its own for you to select an ETF for your portfolio.

Ask yourself some critical questions: what association or affiliation does the blogger (Mike) have with iShares? Does he sell the security for profit? Does he own shares in iShares parent company? Is he trying to induce you to pay for advice by providing some basic facts to build trust with you? Is he an amateur “wannabe” advisor playing on the internet from his basement apartment? (In the interests of full disclosure: I do not sell or recommend any securities and carry no license to do so, I do not own shares of iShares parent company {I do own some units of XIU in my portfolio}, I do not solicit clients via my blog, I have a BA from UWO with a major in economics, hold a FMA designation from the Canadian Securities Institute and have 27 years experience working with major Canadian financial institutions.)

Assuming we can accept that I have no obvious conflict of interest in making the above comments about XIU and that I have sufficient experience to suggest the data is likely correct; the challenge becomes determining why I shared the comments and whether I am might be unknowingly passing along inaccurate assumptions. Given the above disclosures, my motives are likely somewhat more pure than an industry originated blog. Given my experience I should know what is accurate and what data is not trustworthy.....right?
The investment world, more so than most others, is filled with people who write with conviction about investments that they do not understand. Most advisors do not read a prospectus before selling a fund or stock offering. Information that is passed along is second, third, and often fourth hand by the time it reaches an investor. An analyst might work for a major bank and recommend stock “” for a portfolio. The analyst then shares the report with the senior executives who decide to pass the recommendation to the company’s advisors. The advisors then receive a “hot sheet” with a number of analyst recommendations, including In order to support the recommendation a small sales blurb is included with the hot sheet and this is what the advisor reads. The advisor is looking to make a sale so they approach clients with the recommendation, often pretending to have researched the stock and determined that it is the most suitable for the investor. The challenge for the investor is that the motives and skill of the analyst, bank brokerage executives and the advisor are all built into the risk of the investment. If we lift the hood on the whole process and peer inside we might see the following:

The bank is trying to win business from as a securities advisor, commercial lender, or corporate banker. They approach the analyst and suggest a strong recommendation might help our sales pitch. The analyst reviews the company, and not finding any major problems and knowing the banks business plans; the analyst uses some extra positive adjectives to ramp up excitement about ABC stock as an investment. The bank executives love the report and strongly suggest the advisors jump on this opportunity as supported by the analyst report. The advisor, looking for a security to sell, reads the sales blurb from the tip sheet and feels comfortable selling the securities of ABC because a top analyst has recommended the firm and the tip sheet sounds very positive on the future of ABC. The investor is overwhelmed by the opportunity as described by the advisor, recommended by the bank, and supported by a respected analyst. The analyst has a CFA designation and plenty of experience. The bank executives see no obvious problems with ABC and benefit from accepting the analyst report and adding their full support to the recommendation. The advisor trusts the firm he works for and feels the analyst must have done the hard research before making such a positive recommendation. The analyst gains positive stature and a reputation for being dependable from his companies senior executives. The executives get a positive reception from the management of ABC when they suggest their services to ABC at a significant revenue gain for the bank. The advisor gets a positive story they can sell to investors about a stock the investor will likely buy thus generating commissions for the advisor. Nobody lied to anybody. No factually incorrect statements will be made to anybody. Everybody feels good and has benefited..... With one exception. The investor has bought a mediocre stock based upon marketing hype that is not supported by ABC’s relative strength as an investment. While nothing is “wrong” with ABC, it is just not the best option the investor could have bought. There is no way for the investor to know what motives were behind the recommendation and it is difficult to point to other securities you might have bought a year or two after the fact when ABC has lagged the market by a few per cent. It might even have gained in value versus the book value.
Solution: So, “buyers beware” is the key when investors receive advice from ANYBODY! Check multiple sources. How many analysts are following ABC and how many of those rate ABC as a strong buying opportunity? Ask the advisor the right questions: have you read the full analysis yourself, what are the key risks outlined, is your bank soliciting business or doing business with ABC and how did you confirm that, what other securities did you consider and why is ABC a better choice, why do I need another stock in my portfolio and why this sector of the market at this point in the business cycle?
As my good friend Joe always says.....”It is good to trust but safer to not trust”! That translates to “trust but always verify” when you are an investor!