Canadian Banks Don't Return Your Love

You can’t spend meaningful time in Canada without hearing how much Canadians love their banks. There are five large banks in Canada that dominate the banking industry. Their activities pervade all aspects of the financial lives of Canadians, including investing.

Justifiable pride

The pride Canadians have in their banks is largely justified. According to this assessment, the banks are perceived as stable and secure. They charge low fees and provide good value. It’s fairly easy to switch from one bank to another in an effort to save fees. The online services offered by the banks are convenient and easy to use.

That’s a lot to like!

Ethical challenges

The lofty image of Canadian banks has recently taken some troublesome hits. According to one report published March 6, 2017, three employees of TD Bank Group said they were under “incredible pressure “ to squeeze profits from customers by signing them up for unnecessary products and services. The Bank denied the allegations.

Subsequently, employees from all five of Canada’s big banks “flooded” CBC News with over 1000 e-mails “with stories of how they feel pressured to upsell, trick and even lie to customers to meet unrealistic sales targets and keep their jobs.” Again, the banks denied these allegations.

On June 27, 2017, a trio of Royal Bank of Canada firms was reported to be paying $21.8 million in compensation to clients for allegedly overcharging them in “certain mutual funds and fee-based accounts.”

Canadian banks have a long way to go to catch up to the ethically challenged banks in the U.S. Nevertheless, these recent missteps may be a red flag that the abuses so common in the investing industry here are making incursions into our northern neighbor.

Misplaced confidence

For now, the vast majority of Canadians are content to rely on the purported investing expertise of the big banks. Apparently, they believe the generally positive reputation of the banks means they can repose confidence in their investing advice.

To date, the flood of funds from investors in the U.S. fleeing actively managed funds for index-based investments (you can see evidence of this shift here) has been only a trickle in Canada. The story is much different in Canada. The trend there is “...more active and a move away from the tiny amount of passive already in place.”

The data tells a different story

The SPIVA Canada Scorecard reports on the performance of actively managed Canadian mutual funds (the type of funds commonly recommended by Canadian banks) and compares the performance of those funds to their benchmark index. Canadian investors can capture the returns of the index, less low management fees of the index funds, by purchasing a fund that tracks the index.

The purported investment skill of the big banks is their ability to select actively managed funds that are able to beat the returns of their benchmark index. The data indicates relying on them to do this is a bad bet.

Here are the highlights from the SPIVA Canada Scorecard for the year ending 2016:

  • For all observation periods (1, 3, 5 and 10-year periods) “less than the majority of managers outperformed their respect benchmarks, regardless of their mandate or performance period.”
  • Only one-fifth of Canadian equity funds outperformed the S&P/TSX Composite over the one-year period.
  • Most domestic equity active managers underperformed over the 5 year period. Less than one-quarter of funds outperformed over a 10 year period.
  • Funds investing in U.S. stocks performed very badly. Only 1.72% and 2.25% beat the S&P 500 index over the 10 and 3 year period.

Clearly, the odds of Canadian investors beating the returns of index funds by relying on the big banks (or others) to identify outperforming actively managed funds prospectively is statistically small. The task is daunting. There’s ample evidence that relying on past performance is not a reliable indicator of future performance. Relatively few funds are able to maintain their status as stellar performers.

Regardless of the advisor you choose, Canadian investors (like their U.S. counterparts) should focus on keeping costs and fees low. They should insist on a globally diversified portfolio of low management fee index funds, exchange traded funds or passively managed funds in a suitable asset allocation. They should eschew expensive, actively managed funds.

Canadians would be well-advised to reevaluate the “investing expertise” of the banks they “love.”

The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.

Any data, information or content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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