By Dan Hallett on June 15, 2010
I have been a happy ING DIRECT banking and insurance client for more than a dozen years. A little more than two years ago, they sent me (and presumably all of their clients) a brochure on their then-new Streetwise Funds® which extolled the virtues of indexing and minimizing costs. In very broad terms, I won’t argue against an approach aimed at delivering broad diversification with low fees. But that initial promotion placed ING DIRECT among the industry’s most impressive spin-doctors. The table below summarizes my observations from the original brochure I received promoting these funds.
|Discussion Point||ING DIRECT’s claim||My take|
|Average Canadian Balanced fund MERs||They say, at 2.6% annually, we’re the highest among eight developed nations.||While they never disclosed the source of this data, it seemingly came from an academic paper that I discovered, after an in-depth review, had significant methodological weaknesses. That aside, the data used in that paper is from 2002. The current asset-weighted MER for balanced funds is 2.0% per year (2007-09).|
|Expert opinion||The brochure quoted what they presented as financial experts to promote the strategy used by their new funds.||The experts included a few journalists and a CFA charterholder employed by the manager of the funds (State Street). The brochure did not disclose that State Street was the funds’ manager. This disclosure is found in the prospectus, however.|
|Impact on fee savings||The brochure contained a bar chart showing the impact of fee differences between 2.6% and 1%.||Aside from a corrected and updated fee figure, what’s missing is the bar chart showing the impact of fee differences between the 1% Streetwise® MER and the 0.3% per year cost of a balanced portfolio of ETFs.|
|Advisor compensation||The brochure boasted of “facts” that “they” [financial advisors] don’t want you to know about.||According to the prospectus, Streetwise Funds® pay a trailer commission of 0.4% per year to ING DIRECT Funds Limited (a related fund dealer), which is similar to the commission “they” get paid on load balanced mutual funds.|
|Success of active managers||The brochure quoted others as saying that about 80% of actively managed funds underpeform their respective indices.||But the brochure doesn’t mention the stats for active managers compared to the index minus the 1% MER charged by ING DIRECT’s funds.|
So why bother talking about two-year-old information? Between its recent press release and the Streetwise Funds® website, ING DIRECT continues to use nearly all of these arguments. For instance, two years after I received my first brochure, the June 2010 release states in part, “And because The Streetwise Funds use an index-based approach, they keep costs down with a low 1% MER compared to an average 2.6% MER that Canadians pay for the average balanced fund“. This figure is, in fact, eight years old and a full 30% above what Canadians actually pay, on average, for all balanced funds (i.e. equity balanced, fixed income balanced, neutral balanced, Canadian, foreign, fund of funds, target date, etc).
I admit to holding ING DIRECT to a somewhat higher standard than your garden variety mutual fund company for two reasons.
First, the Streetwise campaign is squarely focused on fees and putting more jingle in its clients’ jeans. And yet they’re offering a rather expensive product by index fund/ETF standards. Second, ING DIRECT gives the impression that it is unlike most other institutions – i.e. “the unmortgage” – by being more customer-friendly and transparent. And its advertising seemingly targets a large contingent of generally unsophisticated investors. And it appears, from my perspective as a client and industry analyst, that they are being less than forthcoming in this mutual fund promotion.
Having said all of that, I concede that these funds could be a decent starting point for unsophisticated investors that already deal with ING DIRECT. The irony is that as those same investors become more knowledgeable and confident, they may soon realize just how much they can save by trading in their Streetwise Funds® for cheaper unbundled options.
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