Why The Banks Are Out To Get You

Wanderer
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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.

They aren’t.

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.

And finally…

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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58 thoughts on “Why The Banks Are Out To Get You”

  1. Yes and friends as well! I thought the layoffs in bank investing were because people are becoming more savvy? Maybe not? Happy New Year 🥳 🐀

  2. Do you know any online investment options for non-residents of Canada? We’re currently with an investment manager that we don’t love (especially because of his fees) because we can’t find any Canadian options where you are setting up the account as non-residents (not sure why this seems scary for them given we are simply canadians living abroad permanently).

    1. To offer advice on this question, it would help to know where your income tax home is and whether your investment accounts are registered retirement accounts or taxable accounts.

      As a permanent non resident of Canada, you may have chosen to be a income tax resident of another country. Where?

      Good luck.

      1. We are tax resident in a no-tax jurisdiction permanently but because our Canadian investments are registered (there’s no equivalent that we can transfer to here) we need to leave the accounts in Canada. I will check Interactive Brokers, I haven’t tried that one yet!

        1. You can absolutely get your money out of registered accounts when non-resident!

          https://www.canada.ca/en/revenue-agency/services/e-services/non-resident-tax-calculator-disclaimer.html

          This webpage will let you pick the investment/account type and where you are and let you know. Since you are in a no-tax country, it should be 25% – you pay this one time, when the money leaves Canada. It can be lower towards other countries…

          Only do this if you don’t intend to come back!
          You might need to work with a specialized accountant who understands how things are outside Canada…
          Do not do this if you intend to come back to Canada!

          Most/no brokerages will work with you to open a non-resident RRSP/TFSA to transfer your current investments as the laws are, as far I can tell, very unclear so they’d rather not touch it. Interactive Brokers might?

      1. https://www.interactivebrokers.com/en/home.php

        Hi Newfangle, here’s their link. I scanned it and couldn’t determine if they serve American citizen expatriates (lots of folks out there, including Vanguard, won’t touch us on account of FATCA-related reasons).

        Do you know the answer to this from your own experience or that of others?

        I’m also thinking about Schwab.

        Thanks and Happy Chinese New Year!

        Dan V
        Taipei, Taiwan

        1. Thanks so much! We actually started with TD originally and they suspended trading in our accounts because we were non-resident. I will check to see if maybe they’ve reversed that policy as it was a few years ago!

          1. The US Gummint’s dumb rules have messed me up as an investor and probably not resulted in my gummint catching one terrorist, one embezzler, one kiddie porno magnate, etc.

            Dan V
            Taipei, Taiwan

          2. I am a non-resident, and I had RRSP & TFSA accounts with TD Direct Investing when I left Canada. They moved all my funds to special non-resident accounts that have a few limitations (e.g. I think I can no longer buy old style mutual funds) but otherwise I have been able to trade normally ever since.

            If you are on the retail side of the bank (TD Canada Trust) things may be different, and that’s why you may have had your accounts suspended.

        2. I am a Canadian in Switzerland using both Schwab and IB with my legit address. Both Schwab and IB are good options for Americans living abroad. Or Canadians. Schwab has no trading fees and IB has no currency exchange fees.

          1. Thanks, Newfangle! Legit address = your Swiss address? Part of the problem for me has been that I haven’t had a US address for years, neither physical nor mailing address.

            Dan V
            Taipei, Taiwan

            1. Yes legit address is Switzerland. Schwab has international division. IB operates out of UK and US at least and I set up while in Europe.

    2. I wrote a book called, “Income and Wealth from Self-Directed Investing”. One of my readers in Bermuda, who wanted to set up a self-directed account with TD, was under the misconception that since he was not in Canada and not a Canadian that this could not be done. A month later while reading Bermuda’s Royal Gazette newspaper I came across an ad saying that self-directed investing was now available to non residents of Canada. You should check with TD. If you are getting nowhere contact me at [email protected] and I will send you the name of a TD manager in self-directed investing who may be able to help you.
      My book which is available at amazon.com/books (author Ian Duncan MacDonald) puts great stress on investors understanding what they are invested in, why they are invested in it and what it is costing them. My advice is to stay as far away as you can from investment advisers who are employed by the banks to separate you from your money. The stock scoring program that comes with my book allows you to pick safe, income producing common stocks that you will generate income and capital gain for you for the rest of your life.

    3. Wealthbar allows you to set up a non-resident account.
      I am also a non-resident of Canada residing in a tax-free jurisdiction.

    4. I am a non-resident, and I had RRSP & TFSA accounts with TD Direct Investing when I left Canada. They moved all my funds to special non-resident accounts that have a few limitations (e.g. I think I can no longer buy old style mutual funds) but otherwise I have been able to trade normally ever since.

      If you are on the retail side of the bank (TD Canada Trust) things may be different, and that’s why you may have had your accounts suspended.

      1. Thanks so much! We were with TD In the US first and then TD Waterhouse in Canada after that. I’ve got lots of great options to look into, thanks for all of you!

  3. Good one. I had a similar experience once, but concluded the rep in question was so poorly informed that his misinformation (“emerging market index funds actually don’t exist”) stemmed more from cluelessness than malevolence…

  4. Former banker here. What the s*** is going on in Canadian banking!? You can’t tell a customer something like that down here in the US! You can tell them all the reasons why your high fee mutual fund is better than ETFs (nothing wrong with pushing the products you’re paid to sell), but to tell customers they have to be licensed to buy an index fund? I wasn’t securities licensed, but if I was, it wouldn’t be for long if I engaged in that kind of behavior.

    It’s one thing if the bank didn’t offer that service. Their systems may only be preset to trade with certain securities/annuity products which they might have an agreement to sell (and literature on hand). I had that when I sold annuities; I could only sell annuities from insurance companies my bank directly worked with (which I would have sales brochures for at my desk). So I can see if the banks had the same thing on the securities side. But I couldn’t tell a customer they had to have special government permission to buy annuities from a competitor bank. Not if I wanted to keep my job, at least.

    Oh, to piggyback advice for annuity products, if any annuity salesperson (quite possibly at your bank) tries to get you to buy anything other than a fixed annuity with a Guaranteed Return of Principal (GROP) (also known as a Return of Premium, or ROP) with no Market Value Adjustment (MVA), get up and walk out. ESPECIALLY if the word “variable” is in the annuity. Variable annuities are the nastier cousins of high-fee actively managed mutual funds, and just as unpleasant.

    Sincerely,
    ARB–Angry Retail Banker

    1. Yeah, I don’t know to be honest. Behaviour like this is pretty common, and in the US would probably have led to regulators getting involved. Maybe we’re too polite to complain up here?

  5. I agree with everyone who has said pull your funds if the financial institute doesn’t serve your best interest.

    I have Dual US/CDN citizen status, living in the US, and I finally got around to reviewing my MER (fees) for my CDN RRSP. Holy rip off Batman! They were 1.8 to 2.1%!!!! I had no idea fees could’ve that high as have been a Vanguard/fidelity client in the USA. Mind you the CDN mutual funds were performing well but still! I asked to have it put into VTI and my financial advisor, to his credit, said they could do that. He did it without delay. I had to pay a one time 1% purchase fee but now there are no more MERs and I just pay the small RRSP annual account management fee. If you are interested BMO manages my RRSP and other than the high MER fees, which are my fault for assuming they were like the USA, I have been very happy with the portfolio returns, communication and customer service. If you would like the name of my advisor, I’d be happy to share. He provides great service and now for no management fees. Would like to help the ‘poor’ guy out if I can. 😉

    1. 1% purchase fee? Whaaaatttt??? That makes no sense. If you want to stay with BMO, open a discount brokerage account with Investorline and pay $9.95 for a purchase or sale of ETF units. If you don’t want to pay anything when you purchase and only pay a fee when you sell, open a Questrade account. They charge max $9.95 when you do a sell order.

      1% purchase fee??? I’m still upset to read that. What if you have $1 million? Are they going to charge 1% of the total??? That’s sick and wrong!

      1. Thanks for the info DAVE. My ex had set the accounts up when we moved to the USA. AT the time my ex said that was the only option we had as we were living in the USA. That was 30 years ago. thanks for the info I’ll check in with investorline.

    2. And the other thing, you’re paying a “small” RRSP annual account management fee? Huh? Why? None of this makes sense. You shouldn’t be paying any of this. Has someone pulled the wool over your eyes? Something isn’t right in this story.

  6. Hmm, So such 3rd rate phony banks do exist even in North America employing liars and cheats. Let the reader’s letter and the MR response serve as a wake-up call to those who are new to investing.

  7. The financial industry as a whole is worse than used car salesmen. I grew up in a agricultural states so I learned a lot from landowners and farmers.

    But later, when I was going to College and got the sales pitch on student loans I realized most of the financial industry is more corrupt than the inner workings of most national governments.

    So, anyone who “sells you” on borrowing money (Going into dept) is good, or that you can’t invest or control your own money so you need to give it to them so you can pay them to do it have a special place in hell reserved for them.

    Getting advice or mentor ship from successful people who aren’t making them use you as a middle man is the way to go.

    The Millennial-Revolution dynamic duo are legitimately a fun great pare who give great advice and are also good people to hang with.

  8. Yup I had such a so-called financial advisor in the US when I was young and didn’t know any better so I get that it happens that occasionally people pick the wrong teacher when we are learning and don’t yet have confidence in what to do. The advisor coincidentally thought her company’s (poorly performing) proprietary funds were the best choice for me and educated me on the difference between Front Load and Back Load funds. When I asked about No Load, index or other brand funds she said I could not purchase such funds in my account and that they are not good anyway because nobody is watching whether the funds are invested appropriately the way she could with her company’s funds. Thank goodness there are better teachers to learn from like you and other free websites! And that this company had to retrain these advisors after the class action lawsuit, not that I stuck around long enough to find out.

  9. I am a Canadian lawyer, and this is a quote in an email from my previous financial manager after I said I wanted to move all my money from mutual funds to ETFs:

    “An ETF solution fundamentally changes your investment strategy—from a risk perspective and performance perspective; you’re guaranteed to underperform the Market, right? I’m not entirely sure that’s what you really want? I could be wrong?

    I only mention this because slick advertisement and poorly written articles have confused far too many people. ETFs don’t and can’t outperform the Market. That is not the intent of ETFs. This is not what they are designed for. Due to their passive nature, volatility, and underperformance, the cost to manage them is dirt cheap.

    Your current funds, minus their cost to manage, outperform their respective index on risk and absolute return. So, I always get a bit baffled when people want to move from high quality investment solutions with solid returns over time, to low quality solutions with significantly lower returns over time. It’s counterintuitive of what most people want. Again, too much advertising and too much information without context.

    The potential for a better return has nothing to do with fees! That’s advertising! Return comes from the level of risk you want to take and the risk you’re comfortable taking.”

    … I am now happily invested in index funds much like the wonderful authors of this blog (and fantastic book “Quit Like a Millionaire”). Cheers.

  10. I’ve been lied to blatantly by an RBC and a TD “financial advisor” separately.

    The RBC advisor said I was ineligible to invest without her because I was an international student. It was wrong, I was a legal residence with a SIN card. I invest in everything on my own. ETF, stocks, bonds, gold.

    The TD advisor said stocks can tank and have 0 value, but his mutual fund wouldn’t (which is a wrap for stocks too…). To intimidate me, he drew a dramatic parabola showing how stocks could go to 0. We call him “the parabola man” at home.

    Liars.

      1. Hi Wanderer,

        I am of view that it is worthwhile giving it a try. This will gauge whether the Authority is serious about clamping down on such mispractice (as per my perspective).

        WTK

  11. Whatever country is your legal residence look up discount brokers there.

    In the US trading at most brokers is now FREE.

    Interactive brokers operates in many countries but their site is not as simple as sites from TD AMERITRADE/Shawb, Etrade, Fidelity, etc

    Once your account is open you can then buy any ETF’S that are allowed to be bought in your home country.

  12. I didn’t have a problem with a bank, but I did have one with my Fidelity Rollover IRA. For some reason it was IMPOSSIBLE for Fidelity to allow me to independently perform online ACH withdrawals from that IRA (owned in my name only) into my checking account (owned in my and my spouse’s trust’s name). The funny thing is, I had NO problem independently performing online ACH withdrawals from my work 401k managed by Fidelity (also owned in my name only) into that same checking account! *SIGH*

    I had no issues whatsoever making such online withdrawals from my Vanguard Rollover IRA (also owned in my name only). I typically do my monthly financial management (aka “variable monthly withdrawals”) during non business days/hours, so naturally we moved the majority of the money from my Fidelity Rollover IRA to my Vanguard Rollover IRA. We use my Fidelity Rollover IRA as our “long term care self-insurance” fund (rather than for our monthly expenses), since withdrawals can only be made by talking with a real person during normal business days/hours.

  13. To claim nonresident status you have to prove you don’t have links to Canada, but the banks in your country should be able to set you up in a self directed account and you can buy ETFs in any exchange such as the tsx.i should be able to find out more about opening a trading account in Taiwan, my wife is Taiwanese.

    Cheers

  14. Great post.

    One quibble, though. Expense ratios for actively managed funds in the U.S. have come down significantly below 1%, to around .67%.

    Quote from Morningstar study:

    “The asset-weighted average fee for actively managed funds also fell, from 0.71% in 2017 to 0.67% in 2018. This 5% decline was the largest we’ve measured since we began tracking the trend in active funds’ asset-weighted average fees in 2000”

    So the typical expense ratio someone is paying for an actively managed mutual fund is now .67%. And that was for 2018. It probably dropped a little more in 2019.

    https://www.morningstar.com/articles/925303/2018-morningstar-fee-study-finds-that-fund-prices-continue-to-decline

    That said, I would NEVER go to a bank to buy a mutual fund. They not only recommend the highest expense ratio products, they usually recommend funds with sales charges or “loads” as well. So you may be right if we are talking about buying a mutual fund through a bank.

    I don’t know how it is in Canada, but in the U.S. over the last 25 years, it’s been pretty easy to go to a mutual fund company or brokerage directly to get cheaper, no-load funds. And the no load funds usually have lower expense ratios as well. Obviously, not as low as index funds, but not quite as bad as you’re making them out to be.

    Some of Vanguard’s Admiral share class funds like Vanguard Wellington and Vanguard Wellesley Income are almost as cheap as index funds and are worth considering. The 50k minimum should be no problem for the FI crowd, but even Vanguard’s more expensive “Investor” share classes of these funds are still pretty cheap.

      1. Yeah, you’re not going to get active funds that charge index fund like fees. I mean, Fidelity now has index funds with 0% expense ratios! But like I said, some of Vanguard’s get pretty close. The Admiral share class of Vanguard Wellington (50k minimum) charges .17%. I can remember when Vanguard’s index funds were charging more than that (and no, I’m not that much older than you!).

        The U.S. has many flaws (health care costs, anyone??), but fees on mutual funds here seem to be much lower than in other countries. Canada seems like it’s a real rip off in this area. It’s great to see you guys leading the charge to get Canadians out of being ripped off by banks and high fee mutual funds!

        1. Oh, and Vanguard Wellington actually beat the S&P 500 Stock index over the last 20 years, despite being a more conservative asset mix (typically about 65% stocks 35% bonds). It returns 7.25% over the last 20 years versus about 6.10% for the S&P. I know there’s no guarantee it will continue to outperform in the future, but it seems like a fund worth of consideration. Too bad you guys aren’t Americans, because I think you’d seriously consider given that it has low fees, great returns, and it’s right around your ideal asset allocation.

  15. To play devils advocate; first off the bank employee may not even know about ETFs as crazy as that sounds or think you were referring to actually directly buy the DJIA or something other runs directly. (Though as I type that our, lie seems more plausible).

    Secondly, I completely agree you should stay away from banks but if someone such as your original reader doesn’t understand how to buy an ETF, than this article could be damaging as well. While we should stay away from banks, some advisors such as fee only or ones that stand behind ETfs are not always a bad idea, and paying 1% or .75% for someone too lazy to do some research online for free is going to be better than not investing. You guys used Garth for years correct? Some advisors are legally fiduciaries.

    Just some food for thought.

    1. True, but that’s why we try to teach people how to do everything themselves. The potential for conflicts of interest in the banking industry is just too huge.

  16. Here in the US, we love Vanguard for their non bias approach to investing and the fact that the founder’s (John Bogle) core philosophy was built on the notion that, if you can’t beat the market, you should become the market. Hence ETF becomes the best investment vehicle to get into. I hope people from Canada and other countries can find a similar institution to invest with.

  17. Oh, yes. Walked into my bank (Wells Fargo) very excited to open my Roth IRA in my 20s. Then I was told that they didn’t do that kind of account. Instead, I would need to open up a wealth management account, and that I needed a minimum of $2,500 to do so. (This in spite of the fact that their website clearly contradicted what they told me.) The banker I was working with gave off a super squirrelly vibe the whole time, and that alone should have tipped me off.

    Naively, I signed up for a high-fee — like, REALLY high-fee — high-management account that was totally inappropriate for my needs.

    Needless to say, I am now VERY happy to be away from Wells Fargo.

  18. Omg this is some infuriating shit. What a bald-faced bullshit lie. I’m a Canadian, I bank with TD, I buy TD E-Series index funds all the time myself via like 4 clicks on TD Easyweb. (Recommended, btw, if you don’t want to open a brokerage account– E-Series funds are now completely ETF and super easy to deal with).
    TD employees sure don’t like it though. I go in for something mundane (get foreign currency before I travel, etc) and they always make sure to remind me I should be availing myself of their financial advisors’ services rather than my dangerous and reckless DIY strategies. Lol get bent.

  19. LOL. 15 yrs ago my parent’s broker told them that they “couldn’t buy” SRI index funds. My advice to them was the same – it’s your money, he’s in the service industry for cripes sake, so if he can’t serve you, walk. Oh, and he’s probably lying to your face because the trailer fees on that index aren’t nearly as juicy as what he’s currently got you in (which btw included gambling & racetracks…so, so much for those ‘know your client’ rules, right?). Took them 5 yrs to believe me, but they haven’t looked back since except to wonder why it took them so long to ditch that parasite.

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