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Market Insights

Banks are not a safer place to invest your money

February 12, 2015

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Banks are not a safer place to invest your money

Market Insights

Canadians have a serious problem; they currently pay some of the highest investment management fees in the world. A large part of which is bank held mutual funds, which represent most of the top mutual funds in Canada.

By comparison, low-cost ETFs have so-far gained little traction in Canada despite offering significantly lower fees to clients. Today, with the arrival of online advisors like WealthBar investing with ETFs is easier than ever. You get a balanced portfolio comprised of several low-cost ETFs, more diversified than any of the most popular balanced mutual funds, at a significantly lower cost. Add to that, a personal financial advisor you can work with online. In comparison to the banks, who offer very little advice in return for all the extra fees, this is a big improvement.

However, when we suggest that people should make the switch away from costly mutual funds, we hear a common objection: “the banks are safe” people tell us, “there hasn’t been a Canadian bank failure as long as I can remember” and, “just look what happened in the US”.

It’s all true, we Canadians overwhelmingly trust our big, reliable banks. However, we can assure you, the banks are not a safer place for your investment dollars. Here’s why:

The first reason is CIPF. CIPF protects investment accounts up to $1,000,000 against the insolvency of any IIROC institution, which includes, but isn’t limited to, the banks. You are not insured for any more or less with the bank than any other IIROC member. So your investments with WealthBar, as well as those with almost every registered investment firm, are also protected. (Read “How safe is your money?” to learn more about CIPF.)

The second reason is that your investments are owned by you and in your name. Even if an institution were to become insolvent, your ETFs, stocks, bonds and mutual funds would retain their market value. This is especially true of registered accounts such as TFSA and RRSP. Institutions that hold your money in a TFSA or an RRSP are required to report the cash values (if any) to IIROC on daily basis and are not allowed to use the funds in registered accounts for any other transactions.

It goes without saying, of course, that ordinary investment losses aren’t protected, not with the bank, nor with anyone else. When you invest in a mutual fund, stock, or anything else with any downside risk, you take on that risk yourself. A bank advisor is no more likely to ensure you are in a safe low-cost fund than anyone else. In fact, they are usually incentivized and encouraged to sell you the more costly and, in some cases, riskier mutual funds.

As for WealthBar, we are a fully registered Portfolio Manager and much like the banks, are regulated by all of the Canadian provincial securities commissions (or directly by the provincial Ministry of Justice where applicable). We are expected to hold to some of the highest standards of client fiduciary duty and are responsible for assessing and informing you of your risk tolerance and recommending an appropriate portfolio. Moreover, since we don’t get paid anything by fund companies, we have no incentive to do anything but choose the best and most cost-effective ETFs for your portfolio.

It’s time for Canadians to let go of this perception of big bank safety. When you buy a mutual fund from a bank, you are not actually investing in the bank (though many Canadian funds do tend to hold bank stocks). You are investing in that fund, no matter where you buy the fund. Just as when you invest with WealthBar you are not investing in WealthBar, you are investing in a portfolio of fairly boring and quite ordinary ETFs (a few of which are even managed by the banks). Investing through the banks is really only adding more cost, inconvenience, and confusion to your investments.

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