Your Best Investment
The best investment you can make is an investment in yourself.
Warren Buffett, CEO of Berkshire Hathaway
A little investing know-how can go a long way. Millions of Canadians have the potential to substantially increase their retirement nest eggs, and to live better lives as a result, by getting more from their investments. Beat the Bank will provide the insight you need to ensure that more of your investment returns end up where they belong – in your pocket!
You’ll be the judge, of course, but I believe that, among the many surprises you will discover by reading this book, the most important will be how simple it can be to invest more successfully. Learn a bit, earn a lot. It’s easy when you know how.
In early 2013 I was at my desk in one of the bank towers in downtown Toronto when I received a call from my sister Mary, regarding her investments. Approaching retirement and living in New Brunswick, Mary and her husband have university degrees, devoted their careers to the health care profession, raised two girls, and sacrificed to save a modest amount to supplement their pension income. The call went something like this:
Mary: “We haven’t saved a huge amount, but every dollar of it will count when we retire. We don’t understand why the mutual fund we own through our bank has gained so little over the past twenty years when we constantly hear about how well the market is performing. Can you have a look?”
Larry: “Sure. Let me check it out.”
(With a few clicks I found the ‘Fund Facts’ description of Mary’s mutual fund.)
Larry: “Mary, are you aware that your bank charges fees amounting to 2.3 percent a year?”
Mary: “Okay, but 2.3 percent of our gains doesn’t sound like very much.”
Larry: “No. Not 2.3 percent of your gains. Your bank charges 2.3 percent of your total investment. Every year.”
Mary: “You mean they charge fees whether the fund goes up or down?”
Larry: “Unfortunately, yes. That’s the way mutual funds work. And at 2.3 percent annually for twenty years, fees have eaten up 30 or 40 percent of your money!”
I was embarrassed. I felt ashamed of how my industry was treating my sister. Mary was shocked and upset. She felt betrayed. She made the mistake of unconditionally trusting her bank to treat her fairly. Instead, many thousands of dollars of her precious savings were lost. Mary would likely have experienced the same result dealing with any big bank or traditional mutual fund provider.
Millions of Canadian investors are just like Mary. What about you?
Most of Canada’s providers of investment products and services-the top banks, insurers, and mutual fund companies-are headquartered on, or very close to, Bay Street in downtown Toronto. Just as the term ‘Wall Street’ references the entire US financial industry, the term ‘Bay Street’ has come to signify the Canadian financial industry and its armies of bankers, brokers, salespeople, and advisors across the country. There are two sides to the investment business: the ‘investment banking’ or capital markets business, where I spent my career focusing on large institutional investors as well as big corporations, governments, and financial institutions; and the separate retail investment business, which deals with individual investors like you and Mary. Whether you deal with a local investment advisor in Victoria, St. John’s or somewhere in between, you are ultimately dealing with Bay Street.
An Enlightened Banker
I have been blessed with good fortune and opportunity in virtually every aspect of my life, including my thirty-five-year investment banking career. I predominantly worked with RBC Capital Markets, both in Toronto and in London, England, where I had exceptional colleagues and incredible learning experiences while dealing with the largest and most sophisticated investors in Canada and around the world.
Prior to joining RBC in 1987, I worked for an insurance company (Sun Life), a bank (Scotiabank), a trust company (Canada Trust), and a brokerage house (Merrill Lynch Canada). This personal tour of the ‘four pillars’ of the Canadian financial system gave me a unique and unusually broad range of experience to apply to my new position on the Cross Markets Desk in RBC’s bond department. No, we weren’t a cranky bunch. ‘Cross,’ in this case, referred to our mandate to create new financial products and client solutions by using various markets such as bonds, stocks, currencies, commodities, and the rapidly developing derivative products that were beginning to link them all in inventive ways. We would construct $100-million financing deals, or even billion-dollar deals with multiple components, and value them literally down to the penny. And we could quickly reverse-engineer complex deals created by others and find the best bits to add to our toolbox. Without the burden of any daily product or client responsibilities, our happy little ‘financial engineering lab’ was unique on Bay Street-and the timing was perfect.
Sure, some ideas never took flight, but many innovations successfully delivered real value to large institutions, corporations, and governments. The Cross Markets Desk also produced very healthy profits for RBC as innovation and value creation enabled us to charge hefty deal fees. But markets evolved, and in the early nineties the Cross Markets Desk was disbanded and we all moved on to more conventional roles within RBC. After spending a couple of years leading a team covering large institutional bond investors, I helped create-and ultimately led-RBC’s Debt Capital Markets Group, which specialized in handling the rapidly increasing volume of debt financing for companies and governments, totalling hundreds of billions of dollars annually. Over many years, my team was consistently #1 in Canadian market share.
Over the past three decades, as trading volumes increased, technology advanced, transparency improved, and clients became more sophisticated, fees declined dramatically across the capital markets
business. Fees paid by large institutional clients in bond and stock trading, foreign exchange, derivatives, and other wholesale products and services are now a small fraction of their former levels.
Today, RBC and the Canadian investment industry generally provide large institutional, corporate, and government clients with highly efficient, low-cost products and services. I take pride in having conceived and developed a number of innovative investment products that significantly contributed to that efficiency.
But what about the other side of the investment business: the retail market? How efficiently does Bay Street deliver products to individual investors? Banks, brokers, insurers, and financial advisors provide individual
Canadians with access to stock and bond investments largely through mutual funds and other investment products that indirectly charge fat fees. Bay Street has done everything in its power to keep both the amount, and the impact, of those investment fees secret. As a result, very few Canadians understand how much they are paying for investment products and services, or how much value they are getting in return. And very few Canadians take the time to find out.
Why? There are several reasons:
* Unconditional trust in the advisor/institution
* Erroneously assuming there are no fees
* Not knowing the right questions to ask
* Fear of asking a ‘dumb’ question
* Not wanting to seem impolite
* Mistaken belief that the advisor/institution must act in the
customer’s best interest
* “I just don’t have time!”
In a financial system traditionally dominated by the six big Canadian banks, these institutions-and by extension the entire Canadian financial industry-occupy a position of paternalistic authority that too many individual investors respect unquestioningly, and even appreciate to some extent. The industry brilliantly capitalizes on the combination of poor understanding of fees, deep loyalty, and misplaced trust by charging Canadians the highest mutual fund fees in the world. Unlike the institutional business, fees paid by the great majority of individual investors have barely budged over the years.
Bay Street fees continue to quietly strip away 50 percent or more of the lifetime investment gains of millions of Canadians. That’s right, 50 percent or more!
Imagine: you work hard, you sacrifice to save, you risk your money in the market over your working lifetime, you trust your bank or advisor to treat you fairly, but their fees silently consume the majority of your investment returns. Who would sign up for this kind of treatment? Millions of unsuspecting Canadians are doing just that. And I am not just talking about inexperienced, less educated investors.
Countless doctors, lawyers, accountants, teachers, successful business owners, and bankers-yes, even bankers-are in precisely this position.
To read the full excerpt click here.