COVER

Investing in the dark

Even many mutual-fund sales representatives lack a detailed understanding of the products they sell

JONATHAN HARRIS January 27 1997
COVER

Investing in the dark

Even many mutual-fund sales representatives lack a detailed understanding of the products they sell

JONATHAN HARRIS January 27 1997

Investing in the dark

COVER

Even many mutual-fund sales representatives lack a detailed understanding of the products they sell

JONATHAN HARRIS

Deidre Gelowitz has been squirrelling away her savings for almost 10 years. The 34-year-old Saskatoon dental office manager is aiming to have enough money to retire by the time she is 50. But even though most of her savings are in mutual funds, Gelowitz readily admits that her knowledge of the topic is sketchy. ‘To be honest, I find it boring—mutual funds and stuff like that,” says Gelowitz. “That’s why I don’t know very much.” Gelowitz is not alone. A recent survey by Torontobased Marketing Solutions, conducted for the mutual-fund industry, found that most investors have only a limited understanding of investment issues. Eighty-five per cent gave an incorrect answer when asked to define a no-load fund—a fund for which buyers do not pay a sales commission. In addition,

88 per cent did not know the definition of “book value” and 62 per cent were unaware that the funds in which they invest charge them an annual management fee.

To some extent, that level of ignorance is probably a result of the mutual-fund industry’s rapid growth. Since 1990, the industry has exploded from $35 billion in assets to $212 billion today. The number of choices would overwhelm even an experienced investor: there are now more than 1,300 funds on the Canadian market—a 160-per-cent increase from 1990. “There’s a lot of confusion, and I think it’s information overload,” says Rob Killeen, a broker and vice-president of Midland Walwyn Capital Inc. in London, Ont. “People are really getting confused about simple things such as management fees, noload funds, deferred-load funds, and how they all work.”

Kim Buitenhuis, executive vice-president of Marketing Solutions, points out that of the estimated 4.5 million Canadian households that invest in mutual funds, almost half have jumped on the fund bandwagon in the past three years. “When you have a large group of consumers who are new to a category,” she adds, “you can assume that they will have less of an understanding than someone who has already been through the ups and downs.”

The lack of consumer knowledge worries many industry observers. “It poses significant problems if you have a downturn in the market,” says Buitenhuis. “It leaves the industry vulnerable to angry consumers.” Alan Wolfson, president of CT Funds, the mutual-fund subsidiary of Canada Trust, concurs: “Customers have to understand there is a risk side as well as a reward side.”

Even many fund executives and sales representatives acknowledge that the industry could do a better job of educating investors. Often, consumers who go looking for basic information on the

risks associated with their funds walk away empty-handed. “On the documentation side, we could go a long way to help people out,” says Killeen. He adds that a typical prospectus—a legal document that describes how a fund invests and what fees it charges—contains information “that is too detailed, too complicated. It should be broken down into simple English.”

But no matter how well the information is presented, there is no guarantee that investors will pay attention to it. Randy Orford, a 32-year-old produce buyer in Chilliwack, B.C., began buying funds from his broker three years ago, but has never once read a prospectus. Nor does he intend to. Like many investors, Orford leaves the task of deciphering the data to his adviser. “Even if I understood the prospectus, I still wouldn’t read it,” says Orford.

Given their low level of knowledge, most Canadians are left scrambling for coherent investment advice. In the Marketing Solutions survey, 71 per cent of respondents said that they rely on their broker, financial planner, fund company or bank to help them decide which mutual funds to purchase. Rod Gallant, a 26-year-old armed forces corporal, says he depends on his bank in Oromocto, N.B., for advice. “The bank explains what different mutual funds are out there to buy, and basically, I go on their word,” says Gallant, who, according to the poll, is among the 33 per cent of investors whose main source of financial advice is a bank, trust company or credit union.

Unfortunately for those investors, bank employees themselves are often not well-informed about mutual funds. During 1996, representatives of Marketing Solutions paid 2,600 visits to bank and trust company branches across Canada and questioned sales

Maclean’s

Marketing Solutions Poll

QJn the past 12 months, how many • hours have you spent reviewing your investments and informing yourself about different investment options?

I Less than an hour

Kill) 1 to 5 hours

I 5 to 10 hours 10 to 20 hours EB More than 20 hours

representatives about particular funds offered by those institutions. Eleven per cent of the sales representatives did not know whether the fund in question carried management fees or what those fees were, 26 per cent did not know whether investors would be taxed on their funds, and 57 per cent did not know who managed the fund. On average, says Buitenhuis, about a third of the information provided by bank and trust company employees is incorrect.

Simon Lewis, president of the mutual-fund arm of the Royal Bank of Canada and Royal Trust, is well aware of the problem. “It’s not something that is a big surprise at all,” says Lewis, adding that the bank is now trying to bring its 9,000 salespeople up to speed. Buitenhuis attributes the knowledge gap to a res cent shift in the banks’ approach to § marketing funds. ‘The attitude of z many institutions was, ‘We don’t d give out advice. We lay out the buffet and let people choose what they like.’ ” Clearly, says Buitenhuis, that is not enough.

Another problem is the paltry amount of time most Canadian investors spend thinking about their investments. In the Maclean’s/Marketing Solutions poll, 51 per cent of respondents said they spent fewer than five hours last year reviewing their financial options. Only 19 per cent devoted more than 20 hours to the task.

Q.HOW knowledgeable would you • say you are as an investor?

I Extremely knowledgeable

I Fairly

I Somewhat

I Not very

I Not at all

Rod Gallant says he spends “probably about 15 to 20 minutes” at the bank each year deciding what funds to buy. Andrew Scipio del Campo, president of Scotia Securities Inc., is baffled by the public’s aversion to studying. ‘We spend a lot of time watching television, and we spend so little time on our financial health,” says Scipio del Campo. “You can’t do this for an hour in February and expect that will take care of it.” Clearly, Canadian investors need to spend more time on their homework.

JONATHAN HARRIS