How to beat the bank, by a former banker
Posted by Robin Powell on September 7, 2018
It’s noticeable how some of the most forthright and articulate advocates for reforming the investing industry are those who’ve worked in it and experienced at first hand the different ways in which it fails consumers.
Most TEBI readers will have heard of Josh Brown, the Reformed Broker. Well, Larry Bates is the Reformed Banker. Larry, who’s based in Toronto, is a former senior banker and investment industry insider who now works as an investor advocate, author and speaker. In his new book, Beat the Bank, he reveals the industry’s secrets, decodes some of the mysteries surrounding investing, and provides a simple, step-by-step guide to reaching your investment goals.
In this candid interview, Larry tells his story, explains the particular issues that Canadian investors face, and discusses his hopes that consumers may finally be released from the stranglehold that Canada’s biggest banks have had on them for decades.
Larry, briefly tell me about the journey you’ve been on and how you came to write this book.
I enjoyed a 35-year investment banking career, mostly with RBC Capital Markets in Toronto and London. Over the years I advised and collaborated with many of the world’s most sophisticated institutional investors and financial institutions. The banking industry generally serves these large clients quite efficiently with low-cost products and services. But in my view, banks, and the investment industry generally, continue to serve most Canadian individual investors very poorly.
Based on investment adviser recommendations, the majority of individual Canadian retirement accounts are invested in high-fee mutual funds with annual charges averaging close to 2%. At this level, fees consume 50% of an investors lifetime investment returns. That is just plain crazy. This compromises not only the financial well-being of individual Canadians, but also the health of our retirement system as a whole.
I believe individual investors can retire better and, if desired, sooner, through simple, low-cost investing. I wrote Beat the Bank to provide average Canadian investors with some basic investment know how and a guide to simple, low-cost investing, largely through index funds, directly through online brokers or through robo-advisers.
Some of the most powerful proponents of low-cost, evidence-based investing are those, like you, who’ve seen the active fund industry from the inside. Would you agree?
Most of us want to feel good about what we do five days a week. We want to feel that the industry we have chosen can both make a profit and serve its customers well. So, when some of us see average investors and retirement savers poorly served, misdirected and overcharged, we get pretty fired up. And our inside knowledge of the industry allows us to cut through some of the noise and get to the heart of the matter.
I love the quote from Einstein at the start of your book, “Unthinking respect for authority is the greatest enemy of the truth.” The impression I’ve long had of Canadians is that they’re far too inclined to believe what they’re told by the big financial institutions. Is that right?
Unconditional trust in any financial institution is unhealthy. The big Canadian banks — and by extension the entire Canadian financial industry — occupy a position of paternalistic authority that too many individual investors respect unquestioningly, and even appreciate to some extent. The industry brilliantly capitalises on the combination of poor understanding of fees, deep loyalty, and misplaced trust by charging Canadians the highest investment fees in the world. You may recall the Canadian banks performed exceptionally well through the 2008/09 financial crisis. This only reinforced the influence the banks have over Canadians.
London has the City, New York has Wall Street and Toronto has Bay Street. From what you’re saying, the misalignment of interests between consumers and investment professionals is just as bad in Canada as it is in the UK and US — and possibly worse?
Regardless of geography, the fundamental problem is that the great majority of investment advisers are conflicted. In order to keep their jobs, most are required to sell bad (i.e. expensive) products. In this regard, the traditional industry’s interests are not just misaligned with investors’ interests — they are directly opposed to them. Such is the paradox of the traditional investment industry: Relative to simpler, more efficient, lower-cost products, the very products upon which the investment industry relies doom their customers to failure. This is not the basis for a constructive relationship! This high-fee investment industry business model will eventually be wound down as investors continue to migrate to lower-cost alternatives in ever-increasing numbers. In my view, it can’t happen fast enough.
I enjoy reading Rob Carrick in the Globe & Mail, and Canadian Couch Potato, and the delightfully named Cut the Crap investing. Are there any other Canadian journalists and bloggers you would recommend?
There are a number of excellent Canadian journalists who shed light on the issue of high investment costs and poor returns but, as in the UK and US, too few investors follow them.
Here are a few: @JonChevreau @ellenroseman @BoomerandEcho and @myownadvisor. Also, Ken Kivenko of www.canadianfundwatch.com has been sounding the alarm on overcharging and other industry misbehaviour for many years.
Like me, you’ve been active in the Transparency Task Force. In Europe, as you know, MiFID II is making asset management more transparent, albeit painfully slowly. How proactive has your own regulator been on this issue?
Regulation of the investment industry in Canada is an unholy mess. Instead of a single FCA or SEC, we have a securities commission for each of our 13 provinces and territories. Our primary investment advisor regulators are “Self Regulatory Organisations” which means the industry largely regulates itself. I could go on and on. Despite this mess there are many good people among the regulators who are trying to do the right thing and some progress is being achieved. But, given the dysfunctionality, the difficulty in achieving consensus and the very powerful, well-funded industry lobby, the pace of progress is glacial.
I’m impressed with what I’ve seen of Wealthsimple, the Canadian online investment management service that seems to be expanding rapidly worldwide. Have you?
Several home grown robo-advisers such as Wealthsimple, Nest Wealth and Just Wealth have launched in Canada. Wealthsimple has a good offering, has been the most aggressive marketer, is Canada’s largest robo and, I believe, is the first to extend their service to the US and the UK. I believe the robo model is the right solution for a large segment of the individual investor market so I expect significant global growth over the foreseeable future.
Barry Ritholtz wrote recently that one of the surprising things he’s learned is “how long it takes Reality to go viral. There are entrenched interests opposed to the Truth; they release their grip on their subjective fantasies very, very slowly.” As far as investing is concerned, do you see things changing any time soon?
Investing smarter can make an enormous difference in the lives of millions of average retirement savers. If we could capture the potential of that opportunity in a single photo or catchy three-word expression, I am sure it would go viral. But, against a pervasive, incredibly powerful, multi-billion dollar marketing machine, in a field which is a dark mystery to most, we are selling an uncertain (although highly probable) benefit which can’t be accurately calculated and will not be obtained for many years or decades.
That is a tall order! Things are changing for the better but we need to find new and better ways to capture the interest of the public. That is the reason I wrote Beat the Bank.
The Evidence-Based Investor is produced by Regis Media, a boutique provider of content and social media management to financial advice firms around the world. For more information, visit our website and YouTube channel, or email Sam Willet or Christina Waider.