Mutual Funds

This one is a touchy subject. In my first job after graduating from university, I worked for the investment management arm of one of Canada's large banks as a performance analyst. This firm managed about $30 billion of assets, and I was responsible for calculating their monthly, quarterly and annual performance, which involved talking to the fund managers and analysts on a regular basis. I therefore knew quite well what they did, why, and how well their funds performed. The truth is, all these intelligent people, with the MBAs and fancy analysis couldn't beat their benchmark index most of the time. This means that if you had just invested in a passive, index fund (meaning a fund that simply tracks a broad index like that S&P 500 or the TSX), you would have done better.

Most banks will try to sell you mutual funds. Not just any mutual funds - THEIR mutual funds. Why? Because they charge a high management fee. Most normal funds charge around the 2% range. Think about that for a second. If your mutual fund generates a yearly return of 7%, you only get 5% after they deduct their fee. And they get this fee regardless of how well your fund does. If your fund loses 3% in a year, your actual performance after fees is -5%. Sucks, doesn't it?

So, next time your financial adviser suggests one of his bank's mutual funds, you should ask some questions. Make sure the management fee isn't too high.

If you're looking at mutual funds, I would suggest sticking to index funds (i.e passive funds that simply try to mimic an index). They tend to do better over the long term, and their management fees are usually quite low, well beneath 1%. Even better, look at passive, index ETFs (exchange-traded funds). Some have management fees as low as 0.15%. This means you get to keep more of your money.

Bottom line? Banks push their own mutual funds because they make more money off of them, and your adviser is probably going to get a higher commission by investing YOUR money in a high-fee mutual fund than in a low-cost index ETF.

If you need more advice or tips, feel free to ask questions in the comments section, or fire me an email. I'm happy to help people save their money and give the banks less.