I listened to a few young people discuss where to go for help investing some savings and one asked whether the banks are the right experts. After all, they handle all the money. Wouldn’t they know more about investing than anyone else? It has taken me a while to think of a reasonable answer.
It’s true that Canadian banks have massive resources and could probably use them to try to generate above-average investment returns. However, they have little incentive to do this with your money. It’s so difficult to beat the market with a massive portfolio that it’s not worth their effort to try very hard.
Banks have an obligation to their shareholders to seek profits. They make money on assets under management. This means they focus on getting your money in the door and keeping it there. Generating above-average profits for you only helps the banks a little, and trying to do so is expensive. All they really have to do is avoid terrible returns so you won’t take your money elsewhere.
When you invest with a bank, they add your money to their mutual funds, GICs, etc. and it becomes part of the massive pool they dip into periodically to add to their profits. You may imagine them working feverishly to invest all this money wisely, but in reality they devote much more effort to drawing people in to invest more money.
One positive with banks is that they are relatively safe. Not perfectly safe, though. Mutual funds do lose money, and GIC interest often fails to keep up with inflation. However, banks are unlikely to outright steal your money. Unfortunately, every investment they offer contains unreasonably large fees that few people understand well.
It’s not just the banks that focus mainly on pumping up their assets under management. Much of the mutual fund industry is the same. But there are exceptions. The challenge is that you need to learn on your own to be able to distinguish a good investment approach from a poor one. You also need to to be knowledgeable to distinguish a good financial advisor from a poor one. I don’t know any shortcuts to finding a good way to invest your savings.