Where's Your Investment Return Coming From?

by Todd McLay

December 13, 2019

Contrary to what most asset managers, mutual fund managers and financial advisors believe, more than 90 percent of your investment return is obtained purely through asset allocation.

What this means is that it is far more important to choose the right asset mix than it is to focus on individual security selection. For example, your ratio of assets, such as government bonds relative to equities, is more significant in the long haul than what actual bonds or stocks you own.

This is very challenging for investment professionals as, more than ever, they are struggling to demonstrate the actual value of their services to clients.

When threatened, most advisors will scurry toward complex and speculative tactics in attempts to prove value to individuals who invest with them. Meanwhile, the market consistently outperforms active asset managers over the long term time and time again. This is partly because of their management fees, but also due to improper asset allocation strategies.

So why does the finance industry hold on so dearly to this outdated approach to managing money? Because it is still working . . . for them.

There are over $1.4 trillion in mutual funds in Canada alone! Investors within these mutual funds pay more than $31 billion in management fees. And yet, over 95 percent of them do not beat the market over a 10-year period.

So, how much are mutual funds actually costing Canadians? Consider that the average market return over the past several decades is around 9 percent. If you pay the average mutual fund management exchange ratio of approximately 2.5 percent, then you are virtually paying more than 35 percent of your potential return in fees to your mutual fund company, advisor and financial institution!

Since 90 percent of your investment returns are a direct result of asset allocation, then you are paying these fees for only 10 percent impact on your investment return. Numbers don’t lie; paying 35 percent for 10 percent will never make sense.

Nevertheless, over the past few decades advisors have been getting away with it. Granting access to mutual funds simply has been enough for many Canadians. Investing has been marketed as overly complex, requiring sophisticated solutions and management. Advisors have targeted complacent investors who have been intimidated to seek out alternatives.

a perfect storm for the mutual fund industry
The current climate is building into a perfect storm for the mutual fund industry.

Just as now-defunct Blockbuster held on too tightly to the former North American ritual of picking up a video for the weekend, the mutual fund industry clings to the status quo in hopes to maintain and protect its profit-generating machine.

But, the gates are starting to come down, which is evident in other sectors. You no longer need to order your appliances from a big-time retailer like Sears. You don’t need to process your photos with a company like Kodak. You don’t have to drive to Toys R Us to buy your kid a new bike. And, you certainly do not need to continue to show up with bags of money to invest into underperforming mutual funds any more either. With new technology and advancements within the exchange traded fund (ETF) space it rarely makes sense to own actively managed portfolios or mutual funds in 2018.

If you want to prudently invest your money while reducing your risk through diversification, you need not only consider mutual funds. In fact, it is a costly decision to do so today.

Ask yourself these three questions when deciding who to invest with:
1. Is my advisory team focussed on the 90 percent or the 10 percent?
2. Does my advisor provide any financial strategies or advice or just simply sell me investments?
3. Is my advisor looking out for my best interests or are they selling me on an approach that works best for them?

* Source: S&P500 Dow Jones Indicies LLC,


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