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So over the break we opened up our email and saw this:
Hello and Happy New Year!
I’m very much enjoying your book, Quit like a Millionaire, and have a question regarding Chapter 10, specifically on the ability to purchase index funds without a fund manager.
Was this set up and purchase of the index fund referenced in Chapter 10 conducted within or outside of Canada (i.e. under “How to Steal from Wall Street” section pg 98 in my book copy)?
I am in Canada and have been informed by my financial institution that I’m unable to purchase index funds individually as I need to be licensed in order to do so (e.g. NASDAQ Index Fund) or, the fund was not offered for personal purchasing without a fund manager. Perhaps this was specific to a banking institute named index fund or I did not fully understand the information they provided me.
When you have a moment, can you kindly provide further details on how you were able to purchase index funds? Or what “types” of index funds would not require a license to purchase – if there is a specific name or general descriptor I may use to more accurately describe them when inquiring about purchase, that would be appreciated.
Thanks in advance!
This thing that your bank told you, which is that you can’t purchase index funds without a license, is what we call a lie, and the person who told you this is a liar. (Those are the technical terms, I didn’t come up with them)
This reader’s encounter fairly closely mirrors my own when I was starting to invest way back in 2007. When I asked to be moved into passive, low-cost mutual funds (ETF’s weren’t that popular back then), I was given this song and dance about how that was a bad idea, and that their actively managed funds was the only way to get above average returns. When I insisted, the bank employee resorted to outright lies, telling me that the funds I was asking for weren’t available to me. I had to bring in a printout from their own website which listed the funds I wanted, and only then he relented.
But why? Why does the finance industry do this? Well…
The Financial Industry Is Not Here To Help You
See, there’s this strange misconception that the finance industry is here to, you know, help you with your finances.
The finance industry is here for one reason and one reason only: to take as much of your money as they can. Whether they do it by signing people up for high-interest consumer debt, talking people into taking out loan after loan on their house, or filling people’s retirement accounts with high-fee actively managed mutual funds, their goal is to make sure as much of your hard-earned money falls into their hands as possible.
Bank-employed financial advisors will always try to get you to buy their own mutual funds, and the higher-fee products, the better. This is because they get paid a commission based on what funds they put you in, and guess what? The higher the MER on the fund, the higher commission they get paid. So they don’t particularly care whether the fund they’re putting you in is any good. They just want their cut. Their cut of YOUR money.
And I didn’t name the bank the reader is referring to directly, because I don’t have to. They all do this, both in Canada and the US. Bank advisors hate index funds, and that’s because…
Index Funds Are a Direct Threat To Their Business Model
A typical actively managed mutual fund in the US will have an MER of about 1% to 1.5%. In Canada, it’s even worse at 2%+. But a passively managed index ETF like the ones we use in our Investment Workshop? Less than 0.1%.
The reason that they are able to offer these for so cheap is twofold: First of all, they don’t have to pay a fancy-pants manager to pick stocks to buy or sell. They just buy the entire index. And secondly, they don’t pay a commission to a bank shill to recommend it to you.
As a result, those bank shills will not only never recommend index funds, they will actively lie and block you from investing in it. Because they realize you’ve figured out a very dangerous truth, and that truth is: You don’t need them.
American novelist Upton Sinclair once wrote “It is difficult to get a man to understand something, when his salary depends upon his not understanding it,” and this is a perfect example of this principle in action. If everyone knew about and used index funds to invest, then bank advisors as a whole would be out of a job.
Anyone Can Buy Index Funds
Here’s the truth: Anyone can buy index funds.
You don’t need to be licensed, and you don’t need anyone’s permission. All you need is a brokerage account.
ETFs stand for Exchange Traded Funds, and they’re called that because they trade on the same stock market as every other stock out there, so if you can buy a share of Amazon, then you can buy a share of VTI.
If you’re not sure how, read through our free Investment Workshop for a step-by-step guide on how to actually do this.
If Your Bank Lies To You, Leave!
This is a great rule to follow in general: I refuse to do business with liars, and so should you.
If you walk into your bank and ask them to be put your money in index funds. The only appropriate response should be “Sure!” and “How much?” Your money is, and this is a super important, YOUR money. Not the bank’s money. Yours. Only you get to decide what to do with it.
If instead, you get the run-around about why they can’t do it, or you’re not eligible, or you’re not licensed, your bank is lying and is clearly putting their self-interest above yours. You should not trust a company like this with your money, so get every last cent out from under them as soon as possible.
And We’re Done
How about you? Have you ever been in a situation like the one our reader described? What did you do? Let’s hear it in the comments below!
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