Don’t Bank On It

Every time I walk into any of the big five banks, I become frustrated at the blatant untruths on the walls.   I find it frustrating that we allow financial institutions to abuse the English language; to their advantage.  What has me so upset?   Currently, and most often, the prominent ad board in the branch is touting the institution’s “Monthly Income Fund”.   The ad shouts out, that for a certain size deposit (investment), you will receive a monthly income currently set at $$$.   It is the use of the word “Income” and “income” that has me riled.

Income to most of us is something we receive that makes us wealthier.  Salaries, wages, earnings, interest, dividends or rent.   The dictionaries and other authoritative sources agree.

Webster’s Online  – The financial gain (earned or unearned) accruing over a given period of time

American Heritage Dictionary – The amount of money or its equivalent received during a period of time in exchange for labor or services, from the sale of goods or property, or as profit from financial investments.

International Accounting Standards Board – Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Most definitions of income have a notion that you have “gained” somehow.  That you will have and will have more than you had before.  Therein lies the problem with these funds being called “Income”.

So what are these funds?  They are in fact usually classified as Canadian Neutral Balanced Funds.  Most have investment objectives like “provide relatively taxefficient monthly distributions consisting of dividend income, interest income and capital gains, as well as the potential for modest capital growth…”.   So how is it that they can provide a steady and level payment from investments that have dividends that are varying, capital gains that are uncertain and growth (or setbacks) that are unpredictable?  The overall results within the fund are not smooth but the hope is that the total income within the fund will exceed the amounts paid out.

The amount the fund is earning (its income) is varying and the amount they pay to you is steady.  If the amount earned within the fund is less than what they are paying out, a part of what you are receiving each month IS YOUR OWN MONEY being sent back to you.  This is called a return of capital.  In other words part of the payment you are receiving could be some of your original investment being returned.   If the fund is earning nothing, which happens on a cyclical basis, your whole payment could be your own money being returned to you.  This is not “Income” under anyone’s definition.  It is not even properly a “Distribution” which is bandied around much, since a distribution implies a payment of part of something gained and again what you receive may not be gains at all, just a return of your original deposit.

Now in fairness, I support the use of a level steady payment from a group of investments with varying incomes and gains to support your needs or wants.  However, we call this cashflow, not income.  It is much clearer, that from a basket of investments, however they are performing, you are removing a set amount of money.  You are not receiving income.   You are working with cashflow.   A very different thing.  You also understand the exposure and the possible up and downs.

Why care?  Over the years, I have had many people tell me that they are looking for something safe and predictable.  We discuss balanced portfolios and the possibility of long term returns from a diversified set of investments and they remain cautious due to the uncertainty associated with the ups and downs of the equity and bond markets and are looking for something more predictable.  They often have selected to continue in GICs or other guaranteed investments, preferring the certainty of returns.  Knowing the income they will earn is important.  Later, after visiting their local bank branch and discussing their needs, they walk out with a new investment in a Monthly Income Fund.  I am sure the bank and its representatives are providing full disclosure, but such disclosure cannot undo the set impression that this bank fund will return them their original investment plus the “income” amount specified “monthly”.  After all, it is a set and steady monthly amount, based on a specified deposit, offered by a bank, isn’t it.  When these funds are offered as an alternative to GICs at very low rates of return, they become a compelling alternative even though they are very different investments in reality.

This use of the English language is very powerful and persuasive.  Would the same results be achieved by the banks if the poster read “Canadian Neutral Balanced Fund with a recommended withdrawal of $$$ each month for each $,000 invested.   The fund is managed to seek dividend income, interest income and capital gains, as well as modest capital growth, that over time may or may not exceed your monthly withdrawals”.   I could at least stop being angered every time I went to the branch.