Advisers who recommend ‘safe’ investments are really just safeguarding their fees |
David McLean is the manager of ROMC Fund.
For decades, Canadians have been taught that successful investing begins with understanding their tolerance for risk. Those who sleep better with steady, predictable returns are urged to choose “safe” investments such as Treasury bills, guaranteed investment certificates or bond funds. Only the strongest of us, we’re told, can stomach volatility for the chance of higher rewards.
But does that not suggest our financial future is determined by our emotions? The concept is nonsense.
When investment advisers lean on Canada’s know-your-client (KYC) rules to recommend products, they often do so not to protect investors, but to protect themselves. Framing the discussion around “risk tolerance” lets them check a compliance box and recommend conservative portfolios that won’t jeopardize their careers – even if those portfolios quietly erode their clients’ wealth. It’s a perfect set-up: Advisers earn a commission, clients sleep soundly, and inflation, which outstrips their meagre gains, eats away at their savings.
The obsession with risk tolerance didn’t appear out of nowhere. It’s the product of a compliance culture that took shape after a wave of lawsuits in the 1990s and 2000s, when........