The month of February is not my favorite month. It’s not the snow. It’s not that I’ve just had about enough of winter. It’s not because it’s a short month.

The reason it nauseates me is because it’s RRSP season. Well, actually it’s not just about RRSP’s but about how I see financial institutions preying on people’s financial ignorance. The culture around them is disgusting, the ads are disgusting, and the effects of the ads tend to reinforce financial ignorance.

Now, don’t get me wrong. RRSP’s are not necessarily a bad thing. They encourage people to save for retirement, and provide the incentive by giving a tax break now. Many need such incentives in order to save.

Eventually, of course, those taxes need to be paid. But if we think we will be making less–and hence be in a lower tax bracket–when we withdraw those funds, or if we think the tax rate will not go up between now and then, there is good incentive to invest in them.

So, RRSP’s may be good for those who:

a. need an incentive to save;

b. believe the tax rates won’t increase;

c. plan to make less after they retire, enough less to put them into a lower bracket;

d. think the gains made in the meantime more than offset RRSP costs and inflationary devaluation.

Many financially savvy don’t buy into all, or even some, of those criteria. Yet, the culture out there, nurtured by the industry, would have you believe that NOT investing in RRSP’s is irresponsible. Do you subscribe to all of the above criteria?

Then, there’s the matter of where to put the hard-earned dollars. Mutual funds make up the vast majority of the $1.325 trillion Canadians have stashed into RRSP’s. These were created to reduce risk by multiplying the variety of investments within one basket. But the reduced risk also means reduced reward. And the fees, both seen and unseen, often eat up much of any gains that may be made.

There are over 100,000 mutual funds in Canada, I’m told. Last year, a friend of mine analyzed the top performing mutual funds and found that, after all hidden fees were taken into account, the top 10 performing funds all returned between 6.0 and 6.35%. So, 99.9% fell below that, with many actually losing money.

Is investing in mutual funds risky? You might not lose (much), but you’re sure not going to gain much, either. If the average gain is half of the 6% (only an assumption, I have no data), that 3% represents barely more than inflation, and is still subject to taxation in the end.

It is well known that the greatest beneficiaries of the mutual fund industry are the mutual fund companies and the brokers who sell their funds.

2017 02 08 Fox guarding henhouse

But here’s what rankles me the most: in many cases, those who advise you on the investments are the same ones who profit from them. Talk about the fox guarding the hen house! It’s the ads that promote this relationship that really grate me because they are simply preying on the financially uneducated.

There are a couple of great TV ads out there right now. In one, the client wonders why his funds aren’t doing well but the mutual fund company keeps making record profits every year. The fund manager says, “It will all work out in the end; it’s a long-term game.” The client responds, “It’s not a game; it’s my family’s retirement!”

In the other, the client calculates, in front of her manager, that the annual fees, compounded over time, will take away approximately 30% of her retirement funds. The fund manager says, “I’m not sure those calculations make much sense.” “You’re right,” she responds, “they don’t.”

In both cases, the screen then switches to an alternative investment, which shall remain unnamed.

Financially savvy investors don’t take those kinds of risks. They avoid mutual funds, and many even avoid RRSP’s entirely for their retirement funding. There are much better alternatives out there than the packaged programs offered by those who are in it mostly to make money off the clients.

As the saying goes, “Who cares more about your money–you, or your investment advisor?”

To be continued . . .

Quote of the Week

Instead of writing my rules, I followed his. And that’s when I knew it all went wrong. Dominic Riccitello