Monday, March 11, 2013

Investors Group Advises Leverage for 75-Year-Old Widow of Modest Means

In late 2006, Mary (not her real name), a 75-year-old widow, accepted the advice of her Investors Group advisor to borrow $50,000 to invest in mutual funds. She has maintained this loan for over 6 years now. Mary is an intelligent woman, but not an experienced investor. It’s easy to see how this move was good for Investors Group, but very hard to see how it was good for Mary.

Mary’s recollection is that this strategy was somehow going to save her heirs money on taxes. The only connection to taxes that I can see is that she can write off the loan interest each year. But this just saves her a fraction of the interest; she still has had to pay the rest.

The main thing this leverage did was add another $50,000 to Investors Group’s assets under management. As of the end of 2012, this figure has shrunk a little to about $49,800. The hidden management expense ratio (MER) cost on these assets is $1211 per year.

After accounting for the tax write-off for interest, Mary has lost $9170 over 6 years. Her average compound return is a loss of 3.0% per year. Over this same period, Canadian bonds rose by an average of 5.9% per year, the TSX rose 2.3% per year, and the S&P 500 lost 0.4% per year. The main reason for Mary’s poor results is the sky-high MERs on Investors Group mutual funds. Mary has paid roughly $7300 in hidden MERs over 6 years. She also has a RRIF with Investors Group where she has paid even more in MERs.

However, focusing on Mary’s dismal investment results is a distraction from the more important question of why she was talked into leveraged investing in the first place. In my opinion, leverage is completely inappropriate for her situation. She is now 81 years old and could use the $9170 she has lost. Fortunately for Mary, it will only cost her about another $200 to collapse the loan and investments. If she had collapsed them back in 2008 or 2009, her losses would have been far greater.

28 comments:

  1. What the WHAT WHAT?? Man I hope there is a private plane of hell for this kind of person (where they have to sell this crap to each other)

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    1. @Big Cajun Man: It's hard to know whether this result is the product of an individual advisor or the training he received.

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  2. IG is the absolute worst of the worst. Nothing but bandits. The scenario described above borders on criminal.

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    1. @Anonymous: Those are strong words. I'm quite unhappy about this situation myself. Perhaps the laws ought to be changed, but I doubt that anything criminal happened.

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  3. Investor's Group head office should be notified of this, and they should be given the opportunity to make this right. Where I sit, this would be at least: the sum of all the fees IG made from this arrangement or what it cost Mary to do this.

    If they refuse, they should be reported to the appropriate provincial securities commission. If no satisfaction, then to small claims court.

    This is not right - and no amount of wriggling can make it right.

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    1. @Anonymous: I can't decide how their head office is likely to react. If it is routine practice to talk retirees into using leverage, then I can't see this going well. However, if this really is an anomaly, then Mary may get somewhere with this approach.

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  4. GET YOUR MONEY BACK! see this topic at www.investoradvocates.ca and this related video and GET YOUR MONEY BACK (you might have to fight for it, but others are doing it) http://youtu.be/qqLhMw3y9bI

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  5. Typical advise from sales people at places like Investors Group, Primerica and World Financial Group to name a few of the worst. Stay away from these companies at all costs!

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    1. @Anonymous: Do you know any specific details of people who have had bad experiences with these companies? I have some direct experience with Investors Group and Primerica, but not World Financial Group. General recommendations can certainly be valuable, but I'm also interested in detecting patterns of the behaviour of these companies.

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    2. World Financial Group is starting to make inroads in Canada. It's growing a lot in Ottawa of late. Their pitch is very similar to Primerica's. If you agree to meet with one of their sales people (probably someone you know directly or indirectly) they will first tell you how good it is to work for World Financial Group and how after a couple years of work you'll be raking in cash without having to do any work. Once they're done trying to convince you about the business they start presenting you with outrageous claims about how much returns they can get on your investments. Since most of their recruits are not well-versed in finance (they've only taken a couple of weekend courses) it's very easy to ask them tough questions if you even know a little. For example, when they present you with these outrageous return claims ask them about leverage, MERs, deferred sales charges and they will get very flustered. I personally have been pitched because I was interested in hearing the spiel because I know people that lost a lot of money through these guys. One person in particular really didn't understand what he got into but apparently made it clear that he had a low-risk tolerance. The World Financial Group representative somehow interpreted that as he wanted to borrow against his house to invest in suspect mutual funds. All this to say, if you're going to pay someone to take care of your finances do your research, find someone who is actually qualified and if you want my specific advise go for a fee-only advisor who can buy you index funds.

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  6. My wife used to have investments with IG until we fixed her RRSP. Those days are long behind her, about 8 years ago now. Unfortunately she was put into the highest priced mutual funds available, a whole slew of them.

    I'm sure IG might have some good practices for many clients but this is certainly NOT one of them.

    Horrible how Mary was advised. The word predatory comes to mind.

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    1. @My Own Advisor: My experience with IG many years ago wasn't much better than your wife's.

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  7. It seems like the value of her funds (essentially flat after 6 years) has been close to market returns minus fees. In this case, with returns of 2-2.5% a year equal to the fees, you have your results. She'd have been better off paying as much as $5000 up front for this advice, invested in XIC/CBB/XSP and still would have come out ahead.

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    1. @Canadian Dividend Blogger: You're right that the investment results were roughly market results minus fees. Mary would have been better off in low-cost index funds. However, even if the investments had worked out better, I still don't think it was sensible for someone in Mary's position to take on leverage.

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  8. I feel a bit dirty here.

    My IGM and Power Financial stocks have done really well for me. They pay a nice dividend as well. Consequently I would not like to see anyone put in this situation. Unfortunately there seems to be little serious government interest in cleaning up the industry.

    Prime America has to be the worst. They target the weakest victims, leverage them and put them in horrible overpriced products. With ridiculous MER's and DSC's They do this to their own friends and families.

    I really think sometimes the financial salespeople who push these products start to believe their own BS.
    I have had some interesting conversations with them.
    I also like when an IG guy in a nice suit attempts to talk to me at some random booth at a trade show or mall. I go to town on them.

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    1. @Paul: My experience with many financial salespeople know little about what they sell and have little idea that it may not be good for people. So, in this sense they believe what they say to prospective clients.

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  9. I'm actually in a similar situation to Mary (though I am in my 30's, not my 80's). My IG advisor suggested that I take a $50K leverage loan around the same time that Mary's advisor suggested the same to her. After a year or so, my advisor suggested that we increase the leverage from $50K to $100K. Then 2008 happened!

    I thought that I was somewhat knowledgeable about investing back in 2006, but since then I've spent a lot of time reading about personal finance and investing and I'm now smart enough to know that I'm not a very sophisticated investor at all. At this point I don't think that leverage is suitable for retail investors--and certainly not in low-performing DSC mutual funds with some of the highest MERs in Canada.

    My leverage loan is certainly the worst investment decision I've ever made. It cost me exactly $3000 in interest last year on my $100K leverage (though I can claim a tax deduction on a portion) plus the drag on my investments due to the high MERs. My portfolio value is probably around where it was when I started the leverage--but interest charges probably make it less.

    I would really like to get rid of my leverage, but I'm not entirely sure about how to go about collapsing the loan. I don't feel that my IG advisor feels a real fiduciary duty toward me, so I wonder if I should get advice from a fee-only advisor to help me proceed in a way that minimizes further damage (e.g. tax implications to winding up investments, etc.).

    Unfortunately, I think that getting clients into a leverage is really just part of the IG advisor playbook.

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    1. @Anonymous: Admitting that there is a lot you don't know is a great start to a better future as an investor. Leverage isn't always a bad thing, but it makes little sense to borrow money and pay close to 3% MERs and be stuck with DSCs. If you've had this loan since 2006, the DSCs must be gone or almost gone unless your investments have been churned. You should be able to collapse the leverage by simply telling your advisor that you're no longer comfortable with it. At the very least your advisor should be able to sell off the mutual funds and pay off all or most of the loan. If there is any loan left over, you'll be stuck with payments for a while.

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    2. @anyomous, sorry to hear about your bad luck.I started a leverage in 2009 and the $100k is at $160k presently. I'm in the allegro agressive fund. What fund are you in? That might make all the difference. You see the fund has to beat the loan amount of 3.75% for you to make any money. Anyways that's what my IG advisor told me.

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    3. @Anonymous (2): As it happens, you started your leverage (2009) at close to the best possible time in history. You should have made more money than this. Investors who try leverage now using expensive mutual funds are taking on big risks.

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  10. I'm an IG advisor and I'll assure you that's not their plan. That being said with over 400 offices there is bound to be a bad apple in the bunch.Our business is a business of referrals so I'm quite sure these vogue reps are long gone. If you would like to discuss your options I'd be more than happy to help. Also just so you known we don't just carry IG funds but full shelf. In 2008 when many advisors weren't answering their phones we were telling our clients to stay the course. Many are retiring this year at 55 so there are some success stories, it's not all bad. Donald Demchuk
    Investors Group 416-483-7667

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    1. @Donald: I find your assurances hollow. I've seen and heard about too many IG advisors pushing leverage. I have no reason to believe that Mary's representative was "rogue". This rep handled Mary's money for the full 7 years of her leverage. Talk of retiring at 55 and "success stories" is just salesmanship.

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    2. @Michael, we have the most mutual funds assets under management and you've heard about a few reps? You don't understand our business model at all. We work on referrals. If you mess someone up they won't refer you. We're independent sales reps.if we have no referral business were done.Oh not to get off topic, but did you hear about Tesco stock dropping due to a dirty accountant? Yeah a small percent make it bad for the rest.

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    3. @Donald: Saying you need referrals is not a persuasive argument. You are just another rep I've encountered who promotes leverage to boost assets under management.

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    4. @Michael, I have very few leverages on my book (less than 10%)Every year I have to pay for insurance for my practice. I run an honest practice that gets my clients much better returns than.the market. But guys like yourself just give advice to people and if things go sideways they say tough luck. I was at a party and I guy was saying how he was recommending stocks to his coworkers. I asked him about risk factor, corrolation, and the like.He had no idea. SDo ypu know what will happen to your portfolio if another 2008 occurs? By saying I need referrals means I'll do the right thing every time to get referral business. Thats our business model.I'm not sure if you'd work for free but I've had to in some cases but the clients interest was first and foremost. I get it that your a do it yourselfer and that's your choice. Some people would rather focus on growing their business then playing with stocks. Some have more time on their hands.

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    5. @Donald: That's drivel. Try to find a stock recommendation on my site. You know nothing about me. I know as much as I want to about you.

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    6. Come on Donald!... The cat is TOTALLY out of the bag for those who understand how this works. Referrals??... More like major cold calling, aggressive sales training and overwhelming solicitation of future and existing clients for referrals. Huge commissions from new clients + high MER's and DSC's weighing down on investment performances year in year out. IG has the best armed to the teeth sales training in the industry and that's why you guys sell alot of overpriced and and underperforming Mutual Funds.

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  11. @Donald: Your statement that you are getting your "clients much better returns than the market" sounds suspicious. Makes it sound like they are all doing better than the respective indices. This is statistically suspect.

    BTW, thank you for having the courage to stand up for IG and what you do. I note that there were no other people that came forward to defend IG or their reps.

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