Do mutual funds make sense for a retired person?

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By Julie Cazzin with John De Goey

Q: I’m a retired senior and my adviser has built me a portfolio comprised of mutual funds. I am hesitant about following his advice as I’m not sure that he fully understands my goals. I don’t even think he has my best interests at heart. What should I do? — Sira

FP Answers: The mutual fund arm of the financial services industry has been confusing people for years. It’s time to stand up to the “bullshift” (a term I coined to describe how the industry shifts our attention to make us feel bullish about its services) that the industry spouts.

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People in finance are generally intelligent, but they also know that most people aren’t as knowledgeable as they are on the finer points of financials and investing, and that that imbalance allows for a degree of moral ambiguity. As such, they can allow false impressions to remain deliberately uncorrected for many years (even decades) with impunity.

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To explain why this is important, let’s begin with simple definitions and distinctions. By now, most people understand that misinformation is an honest mistake where someone passes along wrong information and that disinformation is knowingly and deliberately passed along — often amplifying it.

Similarly, most people recognize that a falsehood is merely something that is not true, while a lie is something that the speaker knows full well is not true. All lies are falsehoods, but not all falsehoods are lies.

Now, where do we draw the line when people who ought to know better insist that their misrepresentations are benign? It is difficult to reliably determine when someone knows something is true or not, so we need to be careful not to ascribe motive when the explanation might involve something such as an accidental slip of the tongue.

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I had a conversation with one of the finest journalists in the country about this. I asked him to distinguish between misinformation and disinformation. He pondered the question and then admitted to not having a cogent yardstick, while adding he was confident he’d “know it when he saw it.”

I’m not so sure. Here was a highly intelligent and discerning fellow who has keen antennae and who is always mindful of spin doctors. I don’t disagree with his take when disinformation is audacious and conspiratorial. But what if it is subtle and deals with something that we might not be particularly familiar with? Would many people recognize disinformation if it was put to them in a presumptive milquetoast manner? I strongly doubt it, and I have proof.

In late 2016, a research paper, The Misguided Beliefs of Financial Advisors, showed that mutual fund registrants in Canada overwhelmingly recommended products with high costs, ran concentrated positions and chased past performance. They did all of this despite a small mountain of widely accepted evidence showing that all these activities were unambiguously harmful for investor outcomes.

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The research concluded that advisers did this even with their own accounts and even after they retired from the business. In other words, this was not a mere case of misplaced agency or chasing commissions. Advisers were giving the wrong advice because they honestly believed it was correct. How could this be?

What I cannot accept is that the industry could allow more than seven years to go by without substantively correcting these false beliefs. If the industry genuinely wants to protect consumers (which is front and centre in all regulatory mandates), then correcting these false beliefs should have been an immediate top priority.

In my view, the advisers are only guilty of spreading misinformation because they honestly believe they’re doing the right thing. They believe this because the industry (their employers, the product manufacturers they use and the regulators) do absolutely nothing to disabuse them of these false beliefs, which are good for business, but not so great for investors.

That ongoing failure to disabuse amounts to wilful disinformation. Errors of omission are just as damning as errors of commission. What originally might have passed as benign misinformation has morphed into nefarious disinformation simply due to the industry’s refusal to correct the problem and protect investors.

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For more than seven years now, mutual fund companies have done nothing tangible to disabuse their representatives of the false beliefs that they themselves helped instil. As such, the financial services industry has crossed the line. In a subtle, almost unnoticed way, it has allowed what might have initially been misinformation to morph into disinformation. We all need to stand up to bullshift and put an end to this immediately.

As for what you should do, you should shop around. Here are three questions to ask, along with the correct answers a successful candidate might offer:

• How much does past performance matter when choosing funds? Answer: It is of no use whatsoever.
• How much do mutual fund costs (management expense rations) matter? Answer: Cost is a major determinant of performance — as a negative indicator. The cheapest products perform the best in the long run.
• Would you recommend concentrating your clients’ portfolios into asset classes or strategies that are doing well currently? Answer: No. Diversification is critical to maximizing long-term risk-adjusted returns.

Astonishingly, the 2016 research said most advisers would likely give the wrong answer to all three of those questions. Even more astonishingly, regulators know this yet have done absolutely nothing to fix the problem.

John De Goey is a portfolio manager at Designed Securities Ltd. (DSL). The views expressed are not necessarily shared by DSL.

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