Recently I visited my bank for mortgage refinancing. Every time I visit my bank, which does not happen often, I ask a bank representative the following question: “What kinds of investments does the bank offer?”. The answer to this question has not changed much over several years. Banks sell investment tools such as:
- saving accounts
- guaranteed investment certificates (GIC)
- mutual funds, and
- exchange-traded fund (ETF)
In today’s market, most of these options — mutual funds and ETFs aside — barely return inflation, so investing in them is a waste of money.
This time I saved myself and the bank adviser time and did not even start the conversation about the worth of investing in such financial tools.
Why do people use these tools?
It is not clear to me why some people would choose to invest in these tools, which are hardly profitable or have high management fees. Could it be a fear of taking responsibility for decisions regarding money? Perhaps it is just easier to leave this decision to somebody else, thus having somebody to blame if the investment goes wrong. Or is it a belief in a management team that handles this money? We all know that there are very few mutual funds that beat the market.
According to Investopedia, about 80 percent of mutual funds underperformed by their relative benchmark over a ten-year period. You could say that the other 20 percent beat their relative benchmark. Why spend time searching for mutual funds if that time could be spent looking for good equity? The number of companies traded on the organized U.S exchanges is significantly lower than the number of mutual funds.
All these tools are easily accessible to any financial adviser promoting them because they have a direct interest in selling them. I recently contacted several companies regarding retirement planning. Each of them replied that they will provide their services with no fees if I invest in the financial tools they offer; otherwise, I must pay 360 CAD per hour for the consultation. So both private and bank financial advisers will push consumers to buy their financial tools that have management fees, but they do not guarantee anything except the fees you will pay regardless of the tool’s performance.
Meanwhile people do invest in these tools; and therefore, banks and other financial institutions continue to offer and profit from them.
What are the alternatives?
Acquire a direct investing account, and manage it yourself. If you believe that there is an exceptional mutual fund or ETF that is performing well, check their holdings and buy equities to hold in your account. This is a cheaper option. All you pay is the equity trade fee — usually 9.99 CAD or less — and there are no annual management fees. You will also have the option to hold only the equities that do well and get rid of those that underperform, unlike holding mutual funds whose management decides which equities to hold. I see only one reason to invest in either mutual funds or ETF: If you have a small amount of money to invest and want to diversify, then buying mutual funds or ETFs will provide the diversification that you pay for in management fees. ETFs offer diversification with significantly lower fees than mutual funds.
Even buying bank shares will be a better alternative than a saving account or a GIC. Most big Canadian banks today pay dividends of about 4% and increase them every year by 5 percent or more.
Real estate counts as another great alternative, but it requires more beginning capital. In my post “Income From Rental Property”, I describe our positive experience entering the real estate market.
There are better alternatives that will earn more than the investing tools offered by financial institutions. All you need is a direct investing account and time spent researching equities. Our investing criteria are described here, and our portfolio of dividend-paying stocks is detailed here. Currently, our overall annual return from dividends is only 5% which will grow with time. Capital gain from our portfolio will be a bonus, but we do not count on it. In 2016 our portfolio return was 12.69 percent. This is a very nice result comparing to 12.25 percent of the S&P 500 total return.