Spiking market volatility and a renewed threat of global economic stagnation caused by COVID- 19 has sent stressed-out investors flocking to advisors.
Many advisors have been reporting a rise in new clients since last spring’s lockdown, and a new survey commissioned by Manulife Investment Management backs it up. It shows 63 per cent of respondents plan to seek investment advice in 2020 compared with half in 2019. And more than half of respondents in Canada indicated they were interested in retirement planning and investing advice.
It’s good that more people are looking for long-term retirement plans managed by professionals, but fear can lead investors into fee traps that consume their investment dollars.
The path to those fee traps typically begins with investors looking to coordinate a mishmash of investments in their registered retirement savings plans (RRSP), and tax-free savings accounts (TFSA). For the vast majority of Canadians, the only route to a diversified, professionally-managed portfolio is through mutual funds.
The price investors pay for diversification and professional management in a mutual fund is an annual fee based on a percentage of the money they have invested called the management expense ratio (MER). MERs vary depending on the fund company and asset class, but a typical MER on a Canadian equity fund purchased through an advisor is about 2.5 per cent.
That might not seem like a lot at first glance, but on a $500,000 portfolio of mutual funds, it adds up to $12,500 annually whether the fund makes money or not. That’s $12,500 each year not invested and not compounding, and potentially hundreds of thousands of dollars over a lifetime of investing.
Baked into the MER is a hidden trailing commission, or trailer fee, to compensate the advisor who sold the fund for “ongoing advice.” A typical trailer fee is one per cent annually – or $10,000 on a $500,000 portfolio of mutual funds each year.
Trailer fees are banned in most of the developed world due to the inherent perception of conflict of interest. You have to wonder if an advisor is selling a fund because it is right for the investor or because it provides the best trailer fee from the mutual fund company.
And it get’s worse.
Some advisors will direct investors toward segregated funds, which are essentially mutual funds wrapped in an insurance product. Seg funds have the potential to make money from the investments they hold but are insured, or partially insured, against losses on the principal amount invested over long terms – often 19 years. Investors pay for that extra security through higher MERs. Manulife – the company that commissioned the survey – for example, sells segregated funds with MERs above three per cent.
Segregated funds have certain advantages for small business owners wanting to protect their savings in the event of bankruptcy, but sometimes appear in workplace defined contribution pension plans.
Advisors sometimes push seg funds on unsuspecting clients through a regulatory loophole known as “the-know-your-client rule,” which requires advisors to document a questionnaire relating to return goals and risk tolerance, and only sell investments in line with the client’s answers.
Some clients might not understand that all investments have some degree of risk and say they expect their savings to grow risk-free. Only segregated funds fit that bill.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
