Tuesday, March 5, 2013

Another look at my Freedom 55 investment

About two and a half years ago I did a post titled: Freedom Fund down 71% Puts Mattress Up 345% . Today I decided to take a look at how my Freedom Fund investment is doing compared to my TD Monthly Income.

I had $1216.78 in my Freedom Fund account back on June 30, 2009. As of this past December my Freedom Fund investment has grown to $1590.22.

If I had put that $1216.78 into a simple, balanced fund like the TD Monthly Income, I'd have $1686.27 today. Despite the TD fund taking a $96.05 lead, I'd argue the fund managers at London Life are doing almost as well as the managers at the TD -- at least when it comes to stock picking. When it comes to the management charges, the Freedom Fund managers are actually ahead.

And that's one problem with Freedom 55 -- the MER charges may be too high.

Oh, and my mattress is still well ahead of my Freedom 55 investment. If I'd simply shoved the money under my mattress, rather than giving it to London Life, I would be sleeping on a lump of cash still worth $4196.71.


  1. You knew I would have a little something to say on this.

    Again comparing TD monthly Income to a segregated fund for cost... is a little like comparing a porsche to a minivan (to use an analogy we have shared before). Of course the fees on a segregated fund are more.... the extra benefits (capital guarantees, death benefit guarantees have a cost).

    I have not stated my position on segregated fund in the past.. but I am not a big fan, but to those that need those benefits to get out of GIC investing... they can be beneficial.

    As you know I have also stated that you have to compare an investment in an apples to apples comparison. As you have also stated in many blogs, you need to compare the investment to a RELEVANT benchmark. I have no idea what your investment with London Life is, but I would guess that it is 100% equity based on the fact its worth 35% of its original value. As you know the TDMI is a balanced fund, so the more fair comparison would be to a London Life Balanced Fund and looking at the return discounting the segregated fund wrapper (insurance) which is likely a 1% extra cost.

    As I have mentioned in the past I am fee conscience and therefore very rarely sell segregated funds. My personal view on segregated funds is that they are very expressive for the average investor for the benefit they receive, and too often the costs are either not mentioned or not fully disclosed. The logical question to ask... I think then is why are so many advisors recommending segregated funds. And this to me... is where it gets exciting as a reporter... we certainly could stir the pot on this.... My belief is that regulators, who are suppose to protect the consumer, have actually pushed more and more advisors into selling segregated funds to the consumers disadvantage... Let me explain.

    The MFDA which regulates our industry (which is required) has a stable of lawyers that continuously add new regulations to our industry. The also have the power to audit a business at any time and require that everything we say, do with a clients needs to be recorded. Also we need to keep all paperwork on a file (even if its 15 yrs old) They also expect once you business has more than 4 advisors in it, you need a branch manager (essentially someone to oversee all trades made by all licensed advisors). All of this regulation adds costs to running your business of course, and the ever threat of being fined or whatever has made many advisors drop their mutual fund license and instead sell segregated funds where the regulations are much more reasonable.

    The next obvious question is the MFDA (which is funded by taxpayers and mutual fund dealers) justifying their "extra" cost. As likely you have guessed it... MERS have to go up as product developers need a compliance department, etc...

    Someone in our industry undertook an investigation into the "success" of the MFDA and guess who ultimately was the biggest benefactor of the MFDA... you guess it the lawyer that work there... most making 6 figure salaries, all with nice pensions. The numbers on that report (but don't quote me, there is where investigative reporting comes in) are something like the MFDA got $20,000,000 in funding and have collected about $200,000 in fines... I would say that is an extreme waste of money. Of the cases you hear of the MFDA would not really be involved anyway... they are handled by the police. The vast majority of the cases where the MFDA have imposed fines are for advisors not taking proper notes (does not mean they did anything wrong) or having pre-signed forms in a file (not saying that is appropriate, but not necessary fraudulant).

    That would make a nice piece and certainly drum up some controversy... has the MFDA actually cost the consumer way more than its benefitted them... my position is way more.

  2. The person commenting above is quite right. I'm not being fair with my comparison to the TD Monthly Income fund. This post is more an attack on advertising hype and than a true post on investing. No matter how you look at this story though, it is disconcerting that a Freedom 55 investment could turn out so poorly. (There are funds that should not have been sold as Freedom 55 investments. They were very poor choices for a portfolio focused on retirement.)

    The rest of the comment, the stuff about the MFDA, sounds very interesting and worth a look. If the story as it unfolds looks good, I'll try and interest one of the reporters with whom I am still in contact since my retirement from the paper. (I was a photographer and not a reporter.)

  3. Oh, I won't be comparing my Freedom 55 investment to the TD Monthly Income again. If someone makes a good point, the least one can do is refrain from committing the same sin again.

  4. I don't disagree with your hypothesis (and frankly would look foolish trying), but in F55F's defence, as I have mentioned before I suspect (but you have never confirmed) that your original investment was in a Janus fund. F55F has fired Janus... we do all make mistakes.

    As I also mentioned, I believed ultimately this falls on the advisors that advised you on this fund and recommended it as the only holding in your portfolio... I understand this part of your portfolio is very minimal, but if the advisor did a risk profile, discussed at length the fund and its limitations and you both agreed to go into the fund, than I see the blame as 80% the advisor and 20% yourself. You do have a pretty good understanding of investing... I mean you have a blog on the subject... likely some judge would consider you an astute investor just for trying to start a blog. (as a side... my recommendation would have been TD Monthly Income Fund at the highest risk)

    If on the other hand you were an investor with limited knowledge, the advisor did no risk tolerance questionnaire, and just recommended this fund without truly explaining the risks of the fund, etc... than I would say that advisor should take 80% blame, London Life the balance. The blame I see on London Life's side is that they poorly explained these funds (Again assuming this was a Janus fund) were very sector specific and could drop so much.

    As I mentioned I only came across that at one of London Life's summit meetings where we get to ask portfolio managers questions. The very question I asked on this fund was: 3 sectors in your portfolio account for over 90% of the fund... certainly one of them at the time was IT... I had some concern over that... the fund manager explained to me that is why we paid them; for them to make investment decisions... which is very true... but the fact the fund was very concentrated added more risk than I was willing to accept for my clients, so we either significantly reduced our position or redeem out of the fund almost immediately...luckily to our client's benefit.

    To me the fund seemed like a very sector specific fund once I had done my due diligence (a la IT specific fund) and my personal investment philosophy is not exceed 5% of an overall portfolio to a specific sector. It's that old adage don't put all your eggs in one basket... in this case it served my clients well.

    If the advisor and/or yourself did not do your due diligences than yes I believe the majority of the fault ultimately lies with him... after all clients rely on us for advice (and trust needs to be there), so if part of the advice to make an informed decision was missing... ultimately that falls on the advisor. I assume he does not have any other part of your portfolio? In my mind, based on our discussions (size of your account) he has lost that option to manage it.... rightly so in my mind.

    I personally would have had you sign off (if you decided this was the only fund you wanted after having some discussion on risk) my liability on this. Actually, truthfully I would have never recommended it as your only holding with us. This is, actually where mutual fund may have protected you... if a Know your client wad done and your risk tolerance (and the fund's risk) did not match... flags would have gone up to protect you... saying the risk of this fund does not match investor profile.

    If memories serves though this fund may actually have had a lower risk rating than it should have... which would also bring MFDA into some accountability (as they should be overseeing this).