As part of the opening of an investment account, usually, you must answer a set of questions finding out how risk-averse you are, called the investment risk profile. Different investment firms have different questionnaires, and this is standard for Mutual Fund based investment firm. The assumption seems to be if you are opening a stock market trading account where you can buy stocks or anything else, you love risk.
The irony of these questionnaires is that if you answer honestly most folks end up in a balanced environment, because rarely will people answer yes to questions like:
- Do you enjoy running in the hallways with knives?
- Does bungee jumping from a hang glider sound cool to you?
- Have you ever held more than 30 lit sparklers at once?
Most of these questionnaires are biased towards pushing investors into the Balanced (and usually higher management fees) funds.
The irony for me is that when I did these questionnaires with TD Mutual Funds, I ended up with a “Balanced risk-averse profile”. This makes sense as I have been burned many times with Nortel and other investments that I have made. The irony is that if I then say, “But I want to invest in the E-series funds“, I am told those are very risky. My opinion is risk has little to do with it, the investment councillor does not make as much selling the E-series funds is the only risk I can see.
Usually I have to argue for a while with the investment councillor, who will eventually say, “OK if you want to buy these funds I will have to change your profile”. Suddenly I love risk, and I am allowed to buy the E-series funds. To celebrate I start using a straight razor to shave myself in the mornings.
Sometimes TD has blocked purchases, in fact, more than once,under the guise of saying, “Your profile says you shouldn’t buy these funds”. The other angle is that you need to redo the questionnaire every few years, in case you become an out of control risk-lover.
What is the Point of These Profiles
Why do these questionnaires exist? I have already stated the bias aspect (i.e. drive customers into higher MER funds), but my guess is that lawyers have mandated them. If I now return to TD and say, “Why did you let me invest in this crap?” they will simply pull out my investing profile and say, “You love Risk, so we let you cut your nose off to spite your face”.
As usual this is another: follow the money, and remember the lawyer’s, situation in financial planning.
How do hobo-investment firms do this? Do they have you do something on-line at least? Do they show you the results?
It’s reasons like this why I made the shift to exclusively doing all of my investing myself. I have a RRSP with my current company and cannot wait until I can shift it into mine on Questrade.
Banks are more concerned these days with getting the sale than they are your actual funds. It’s pretty sad.
I am a “neutral risk” client of CIBC as well. That is why I run Investors edge accounts with close to 100% equities for my RRSP’s and TFSA and have run a HELOC up to $160K as a non-registered investment account. Cut the HELOC account back to $0 as I pay off my retirement Corvette. As well as considerations like getting my OAS clawed back partially because of the dividends from the investments. Should have that under control and back to full OAS for 2018
RICARDO
You are completely correct when you say that the questionnaires are there for the benefit of the salesperson (I wouldn’t call them advisors). If there are any problems, the salesperson uses the questionnaire to meet the “suitability of care” IIROC standard.
My wife and I pushed our advisor to put in the relationship agreement a “in the best interests of the client” paragraph which is a higher standard than currently exists. They need to place our needs above their own. It is not a fiduciary standard, but is better than what is out there now.
I would bet that if you took the prospectus document as well as the MRFP (Managers Report on Fund Performance) for an e-series balanced fund and a regular fund, you would find that they are the same identically managed fund with the sole difference being in the class of share. In other words all administration, research and investment decisions are the same and it is simply a different pool of money in the fund.
Next time, ask your advisor to explain the different classes of shares within the fund. It might be fun to see them squirm as they try to explain why some people get better breaks than the average person.
Great article.
rob…