Have you ever wondered if your banker, insurance agent or investment advisor wasn't telling you the complete story? How would you know if they were?
As a professional in the financial services industry for over three decades, I've been directly involved in the life insurance business, mutual fund business and investment industry as a salesman, and frankly, I'm upset with all of it.
This series of blogs is a behind-the-scenes look into the financial services industry in Canada, giving you helpful tips on how to save money and get better value for the money you spend. Along the way I'll show you how to navigate what I call the "money maze" in today's financial world.
It's Just Retail without the Price Tag!
The first thing that everyone has to understand is that the financial services industry is just like any other retail store. By design, it is a business that exists to make money from you, not for you, by selling financial products.
Unlike all other retail businesses however, the financial services industry (as represented primarily by banks, mutual fund companies, insurance companies and investment firms) doesn't have to disclose how much they're actually selling things for. Think about it. If you walk into any store and want to buy something, you look at the price and decide. You know exactly what you're getting and how much you're paying for it. Now, when you walk into a financial firm and purchase a financial product, I'll bet my house (if my wife will let me) that you have no idea of what the actual cost of that product is.
A simple example is a mutual fund. When you buy a mutual fund you have no idea what the total cost is going to be to you. You may believe that the cost is in some way tied to what they refer to as the Management Expense Ratio (MER), but that isn't the entire cost. Hidden fees can include taxes and transaction costs to name just a few. So when you get an investment statement, does it ever show you what the cost was for that particular purchase? Never! Now look at your VISA statement. I bet that pair of shoes you bought last month is listed there. Listed at exactly the same price you agreed to pay.
The same situation occurs when you buy insurance, bonds, Exchange Traded Funds (ETFs) and most other financial products. So, when you don't know how much things are costing you, how can you possibly know if it's the best fit for you? It's not like that pair of shoes you got to try on. Your Visa statement never lies, but financial products are another story!
It's important to know how the financial services industry makes money off of its financial products. Most people don't have the time to read the 100+ page prospectus that comes most investment portfolios. But once you are aware of hidden costs and underlying fees, that's when you can start to ask questions and make steps to improving your financial wellbeing.