TD, RBC wealth managers worry about fixed income fixation

Fri Oct 5, 2012 3:45pm EDT

* Clients still demand fixed income, shun stocks

* Wealth managers fear clients will never find return

* Balanced or packaged products may help force diversity

By Andrea Hopkins

Oct 5 (Reuters) - For the folks on the front lines of mutual fund management at Canada's top two banks, investor focus on fixed income and aversion to equities is fueling concern that clients may never risk enough to get the returns they need.

Four years after the start of the financial crisis and subsequent bear market, wealth managers at both Royal Bank of Canada and Toronto-Dominion Bank have a hard time convincing clients they need to stop clinging to fixed income funds.

"You've seen the stats - they continue to pour their money into fixed income, and in a low-rate environment, frankly (returns are) not going anywhere soon. That's a dangerous proposition in the long term," said Sandy Cimoroni, president of TD Mutual Funds at Canada's second-largest bank.

"We've got to get clients thinking differently."

In the first three years after 2008, Canadian investors fled from equity funds and poured themselves into bonds and balanced products, searching for safety after seeing their portfolios staggered by the market sell-off.

Some C$56.5 billion flowed into fixed income funds and C$24.2 billion into balanced funds from 2009 to 2011, while C$15.1 billion flowed out of equity funds, according to data from research firm Investor Economics.

But while global stock markets have mostly regained their previous levels - Canada's TSX still lags - the flight to safety has persisted in 2012. Year-to-date flows into fixed income were C$21.5 billion at the end of August, while C$3.0 billion went into balanced funds and equity funds saw C$3.7 billion in net redemptions.

"Right now, clients want fixed income," said Dave Richardson, vice-president at RBC Global Asset Management.

"They continue to be nervous about equity markets, so we're seeing very much a skew in our sales towards fixed income products and even deposit products in our investment book."

That's right - deposit products, Canadian grandmothers' investment tool of choice, otherwise known as Guaranteed Investment Certificates, or GICs. Major banks offer a rate of return of about 1 percent for a one-year GIC, on a good day. Factor in inflation, and investors are risking negative real returns on their money.

Richardson is especially concerned about relatively young investors who believe they can stay safe by sticking to fixed income products.

"I worry most about investors in their 20s, 30s and 40s who are taking a very very conservative approach because their early experience as investors is that bonds perform just as well as stocks without the same risk."

As they travel from branch to branch and talk to advisers and clients, both Cimoroni and Richardson have found that selling the growth potential of stocks is met with skepticism. Just as investors overloaded on equities in the market run-up early in the millennium, now they overload on bonds.

Rather than try to convince anyone to buy equities, advisers and product designers are working together to give clients what they want, if not what the necessarily ask for. That is, fixed income products that diversify a portfolio by adding in high-yield, emerging market or corporate debt, or balanced products that offer better returns with a side of equities.

"Not to be flippant, but clients don't necessarily know what they want - they know what they are trying to solve for. So you try to come up with a solution," said Cimoroni. "An example we have is our Target Return funds."

A concept originally offered only to institutional investors, the TD funds focus on achieving a defined target return over the medium-term, leaving a retail client to pick their outcome, not their asset class.

At RBC, Richardson endorses a similar approach, saying advisers have more luck diversifying a client away from fixed income if they start with what the investor wants to accomplish, and work backward from there.

"It's an easier way to broach the conversation about needing to have that equity exposure than just slapping an equity product in front of them and saying 'Hey, if you don't have a certain amount of growth you are not going to meet your goals,'" Richardson said.

"It's a financial planning approach to investing."

While diversifying fixed income products from the inside out and bulking up the equity side of balanced funds will help clients find returns at the margins, nobody is sure how long it will take to really draw clients back to growth.

"2008 changed everyone's perspective and the ongoing uncertainty hasn't minimized," said Cimoroni. "People are very apprehensive - and for some good reasons, right?"

Richardson believes that it may take bad news in fixed income markets - worse even than scant returns - to push the pendulum back to a stock market strategy.

"Every year investors get better and better educated about how markets operate and try to take the emotions out of their investing, to look forward instead of looking back," he said.

"But I think this is going to be the hardest one for investors to get over. And it may take some challenges in fixed income markets before you see clients look back at equities more often - or as much as we think they should."

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Comments (1)
JohnnyBWise wrote:
I am trying to repost as I do not see my original post (sorry if it comes up twice). I am restating my original in different words.

TD and RBC are only worried about their bottom line – not the welfare of GIC holders in their banks (especially senior citizens). My dad trying to renew his GIC at TD Bank in Kanata, Ontario and was told he could get a 1.5% “special”. My 80 year old dad wanted 2 years and came on a tiualistic basis to renew his GIC in person and update his bank book. The 2 year rate quoted was 1.1%. I said you can get 1.7% via TD Waterhouse for the same product. Answer was to open a TD Waterhouse account for which my dad does not understand and is more paperwork and there is no more in bank service. This flies in the face of TD ads showing 2 senior citizens where TD banks have extended hours and Sunday service. It is not geared to GIC products but to others to buy other services.

In the end my dad accepted a 1.6% 3 year GIC (in fact RBC offered 1.9% off the bat) and my dad stuck with TD to keep with the insured coverage limits.

I personally consider myself a knowlegeable self-taught investor and hav e a 50/50 split with GICs and stocks/mutual funds and invested conservatively based on bank advice (eg buying RBC Oshaunnessy) and am still recouping from losss and have a capital loss credit on my income taxes.

TD and RBC have no risk. I should have listened to Granny’s advice and put it into GICs. I would have been ahead and avoided a pile of investment effort (and income tax paperwork).

I would be happy to have Sandy Cimoroni or Dave Richardson call me to interview me and I can express my disdain for what baks are doing to senior citizens. In fact I think senior citizens need to shop around for GICs and be given the right rates instead of being used as marketing ploys (the TD bank ads). In fact TD bank GIC rates are lower than others and it is ironic. Move your GIC funds out of TD bank if you find better rates elsewhere. Just remember to stay with the insured amount of $100K per person as backup in case Canadian banks tank – unlikely but gives you peace of mind).

JohnnyBWise

Oct 08, 2012 6:35am EDT  --  Report as abuse
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