'Money is better than poverty, if only for financial reasons."
I have always loved that quote from Woody Allen, but it's true. That's why we invest - to make money and stave off poverty. And without educating yourself, you could be that proverbial fool who is soon parted from his or her money.
Last week, I wrote about the problem of financial illiteracy among investors - and how they urgently need to get educated to be able to ask informed questions of their financial advisers.
One of the responses to that column came from a reader named Carol, who asked a good question: How do I know when I'm informed enough? She and her partner have been happy with their mutual fund investments, which were made in a lump sum from early retirement packages six years ago, but the couple have their annual portfolio review next week and want to make sure they aren't missing any important questions.
Just hours after receiving that message, I spoke to Tom Hanza, president of the Investor Education Fund, a non-profit investor literacy organization funded by the Ontario Securities Commission. His job is to help educate the Carols of the world (or at least the Carols in Ontario).
It was serendipitous, because it turns out that Mr. Hanza's organization has some great suggestions for Carol.
One of the fundamental issues for investors is to know exactly how much money you're making, Mr. Hanza says, adding that mutual fund investors often don't know the most basic information about their investments.
His organization's suggestion: Figure out your total return (which includes all interest, dividends and capital gains) and then figure out all your costs (including fees and commissions, and MERs - the cost of managing the funds).
Carol should ask her adviser for these figures, and aim to get them over the longest period she can, hopefully for the six years since she invested her lump sum.
If for any reason an adviser doesn't give you the information you require, you can figure out your returns yourself - the website http://www.showmethereturn.com can show you how. To figure out fees, you can try the Investor Education Fund website at http://www.investored.ca.
Once you know your returns, subtract the costs for your net return, and then compare those results to an appropriate benchmark. If you invest in bonds, compare your returns to a bond index; if your mutual funds are in Canadian equities, you can compare that to the S&P/TSX composite index. The website showmethebenchmark.com will help you find the right benchmark for you.
Next, you will have to decide if you're pleased with your returns or not and, consequently, if you're happy with your adviser or not. If you're not, the Investor Education Fund suggests that you have a serious talk about how to improve your results. The worst-case scenario would see you changing your adviser.
If there's one complaint I hear over and over again from readers and friends, it's about fees: They're considered too high and it's too complicated to figure out just how much you really are paying. Mr. Hanza agrees fees are "a huge issue" for investors, who don't really know where to find the information they need. "There is disclosure [from funds]," he says, "but people don't generally go through their statements well enough to find out what they are."
It's one of the reasons that the Ontario Securities Commission, as part of the Joint Forum of Financial Market Regulators, is pushing for a new way for mutual fund companies to disclose information about fees and fund performance to consumers. Under the proposal, consumers would be handed an easy-to-read, informative fact sheet about the fund, and be given a two-day cooling-off period to change their minds after buying into a fund. So far, industry response to the proposal has been cool, Mr. Hanza says.
Mr. Hanza says most financial advisers are doing a great job, but that there are some general problems in the industry. He says, for example, that investors wanting to buy index funds through their adviser can find it hard to do because "the adviser doesn't get compensated as well from it as from mutual funds." There is also the problem of advisers who point investors to funds that the brokerage is pushing, which aren't necessarily in their best interest.
Knowing how much money you're making and challenging advisers is your best defence, he says.
It will be interesting to see if Carol is doing as well as she thinks she is. That, after all, is the whole point of asking questions. So you can know you're as far away from poverty as possible.
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