The top five reasons you should talk your parents out of mutual funds
Growing up, many of us were probably told, or have at least heard about, mutual funds. Whether you know next to nothing about them, or have an exhaustive knowledge of mutual funds, at some point, a banker is going to ask you to buy some—probably from their own bank—promising big returns. This, however, is unfortunately not the case. Most of the time, the funds sit unlooked at for years. In lieu of this fact, here are some reasons to get out now, or never get in in the first place.
Exorbitant Fees
According to studies, the average cost of investing in a Canadian mutual fund is 2.2 per cent, representing some of the highest fees in the world. As savings grow, so do your fees. Think about it: if you have $500,000 in your portfolio, you will pay $11,000 a year in fees! And that’s not even the worst of it —most balanced funds sit around 2.63 per cent. With most of investors unaware of these numbers, they are standing to lose a lot more than they know.
The “Gifted” Program
Just because your manager is getting paid the big bucks, that doesn’t mean that they are a great performer. Challenge the idea that the more expensive something thing is the better its quality. With the majority of managed funds underperforming compared to the S&P/TSX Composite over the last five years, statistically speaking, the higher the fees the worse the performance.
Limited Exposure to Other Markets
To the average investor, looking for opportunities outside of the home market is a difficult task. Most mutual funds only invest in publicly listed stocks or bonds. “Balanced” mutual funds, therefore, aren’t really all that diverse. They are usually heavily weighted towards Canadian stocks and bonds, and when both are down, portfolios struggle. With the focus being where it is, and diversity restricted, areas like private equity, real estate, commercial mortgages, and other investment opportunities that could turn a portfolio around are missed. By looking in different sectors to invest, you can avoid major losses and can also open up chances for growth.
Lack of Transparency and Reporting
Have you ever actually read a report from your, or your parents, financial advisor? Probably not. This is probably due to the fact that, outside of them being covered in numbers, acronyms, and percentages, they are extremely dense, confusing, and loaded with terms that could drive anyone to burn the pages. Trust me, managers are counting on this. The less likely you are to read the report, the better. It has actually gotten so bad that the government has created new requirements around reporting, as the previous methods left investors open to exploitation and kept them far too in the dark. In addition, where do you think they hide all those fees and payments?
No Financial Plan in Place
Financial planners are focused on sales and sales alone; sales contribute to their bottom line and their wallets, and though they are usually highly inexperienced, they buy and sell anyway. Because of this, many investors are lacking an actual plan, or have a plan that is just a recycled template that the planners use over and over, hoping for a payout at the end. This can lead to not investing your money where you need to achieve your goals, but, instead, in a product that will help the advisor meet theirs. Often such an investment is one that pays the highest commission or is the easiest to sell. In order to efficiently have your wealth grow, clients need a comprehensive plan based on their goals, time horizon, risk tolerance, and unique situations. Simply getting the right advice when choosing between a TFSA and RRSP contribution can save thousands of dollars in taxes.