Hot Off the Web- November 14, 2011

Personal Finance and Investments

In the WSJ’s “Taking bird in hand is tempting with market bushes” Catey Hill’s concerns about high priced variable annuity products which deliver the (nominal) downside protection, but have very little chance of upside opportunity are well founded, yet more and more money is pouring into them as near- and in-retirement boomers are running away from market volatility and are looking for ‘safe’ regular income. (However things can change with Vanguard’s GLWB announcement in October, if only people explored the trade-off and made their decisions based on the facts. (E.g. see my last week’s Vanguard GLWB)

Here are a couple of interesting articles on the important topics of ‘fiduciary’ responsibility and ‘longevity insurance’ from FA Magazine which gives us hope that (at least in the U.S.) changes are under way in the way financial advice is dispensed. The “NAFPA urges DOL to hold firm on advisor regs” article reports that “National Association of Personal Financial Advisors is urging the U.S. Department of Labor to resist lobbying bent on weakening rules that have been proposed for the regulation of financial advisors. Napfa urged support for the proposed changes in response to a letter from a group of Congressional Democrats and the Financial Services Institute to Labor Secretary Hilda Solis opposing the proposed rules.” (The U.S. is set on the path of providing additional protection to clients of advisors by requiring an unambiguous fiduciary duty to clients first, even though the financial industry will fight the change down to the wire. In Canada the fiduciary discussion is not even on the radar, so Caveat Emptor is the operative phrase until governments initiate the required actions.  “Building a moat” reviews merits of (pure) longevity insurance (one of my favourite advocacy topics for many years) for the boomer generation and refers to some of the companies which offer the product in the U.S. (no company offers it in Canada as far as I know): Met Life, Hartford, New York Life. Such products allow retirees to “spend down” their savings to age 85 with the knowledge that the longevity insurance will kick in at 85; it also allows retirees to increase the risk of their portfolio to get some inflation protection, for the same reason. Unfortunately investors/retirees (and even many advisors) don’t understand the product and prices have increased from the during the 5 years of their existence due very low interest rates, so sales have not been brisk. (Recommended in the CFA Institute FinancialNewsbriefs).

Steve Johnson’s Financial Times article “New-fangled convertibles poised to take off” is a teachable moment on the subject of cocos or contingent convertibles which are fixed income securities designed to convert into equities. The subject is discussed in the context of European regulators requiring banks to have higher minimum capital requirements, and cocos would be a mechanism whereby these banks could issue bonds which would automatically convert to stock should their Tier 1 capital drop below required limit (“the event”). These instruments are much like reverse convertibles, which are short term notes (offering high interest) but on maturity convert to equity if the stock price of the issuer drops below some ‘trigger’ level. (Handle both with great care; in fact the higher the interest the higher the likelihood that on maturity you’ll be the proud owner of significantly lower priced stock of the issuer.)

In IndexUniverse’s “The complete guide to ETF taxation” Dennis Hudachek argues that investors are not paying enough attention to the “fund’s structure and associated tax implications”. In the U.S. taxation context he points out that tax treatment is a function of both the underlying assets (e.g. fixed income, equities, commodities, currencies and alternatives)  and the ETF structure (open-end funds, unit investment trusts, grantor trusts, limited partnerships and exchange traded notes). He also discusses advantages/disadvantages of various forms and content of ETFs.

Real Estate

In Palm Beach Post’s “In Florida foreclosure lull ends”Kimberly Miller reports that “A year after the robo-signing scandal brought the foreclosure industry to a standstill, signs of a ramp-up were seen in October as new filings spiked 28 percent in Florida from the previous month.” The numbers are still well down from a year ago especially in ‘judicial states’ like Florida where foreclosures must go through the courts and banks were found to have had ‘paperwork problems’. “Initially, RealtyTrac predicted all foreclosure filings – initial notices, sale notices and bank repossessions – would reach 3 million this year. The company has revised that projection to between 2 million and 2.5 million… “We saw increases begin a few months ago in non-judicial states and it appears that in Florida and other judicial states we are starting to see those increases in earnest,” Blomquist said.” (Time will tell if banks fixed up the process issues.)

And speaking Florida, I received an email from RBM from Europe expressing his frustrations with the Florida property tax system. The writer indicated that despite still falling property prices in the area where his property was located, the county’s property appraiser raised the tax value of his home this year from $270K to $360K. Since he was only using the property 2-4 weeks a year he had it on the market for a while, but he finally just sold it for…you guessed it…$270K. The property appraiser in his county is no other than Mr. Wilkinson, the proud father of the Save-Our-Homes amendment. RBM’s repeated letters to Mr Wilkinson on the subject remain still unanswered. At least he no longer has to deal with him. The question is: when are Floridians going to figure out that forcing out-of-staters to pay 2x, 3x or even 10x the tax on identical properties is not a good way to encourage them to buy property in Florida?!?

Pensions

In Benefits Canada’s “Making sense of CPP changes” Tammy Burns reviews a long list of in-progress changes to the CPP (the U.S. Social Security system’s cheap cousin) that might be of interest to you on: contributions for those colleting CPP and still working, size of reduction/increase of CPP benefit for those taking it before/after age 65 to encourage delay, work cessation test between ages 60 and 65 eliminated, low earning provisions are being increased from current 15% to 17% by 2014, and others.

In the Globe and Mail’s “Find out how your pension stacks up” you can read an excerpt from a new book “Pension Ponzi:  How public sector unions are bankrupting Canada’s health-care, education and your retirement”. The excerpt frames the situation in terms of the circumstances of two couples who are neighbours, one employed in the private and other in the public sector. (There is at least one clear message, and that is about the urgent need for private sector pension reform.)

In Benefits Canada’s “Canada ranks 10^th in pension sustainability” Tammy Burns reports that according to a recent report available at “2011 pension sustainability index”, based on a combination of “current and future demographics, public finances, key features of the system and reforms already in place…The study of 44 pension plans around the globe placed Canada in 10th place—behind Australia, Sweden, Denmark, New Zealand, Netherlands, Norway, Hong Kong, Finland and Switzerland. The U.S.’s pension system ranked 17th.”  (I didn’t get a chance to read the report as yet, but I have to admit that my curiosity has been peaked.)

Things to Ponder

At “The maths behind the madness”you can play with the very timely Economist’s “interactive guide to reducing government debt” and article concludes with “Changing these assumptions can have striking results. Using the average IMF forecasts for 2011-16, general government debt in America is expected to rise from 94% of GDP in 2010 to 129% in 2020. Assuming anaemic GDP growth of just 1.5% a year as opposed to 2.6%, and a nominal interest rate of 4% rather than 2.8%, US debt rises to 157% of GDP in 2020.” (You might also conclude that ultimately the governments will conclude that inflation is the solution!)

A couple of articles, the Financial Post’s “Bank of Canada could slash interest rates in a big way next year” and the Globe and Mail’s “With the shift to thrift, bull market in bonds isn’t over” predict not just continued but even decreasing interest rates in Canada (and the US) in the next couple of years as a result of low inflation, weaker than anticipated economy and the new boomer thrift.

And finally, in the Financial Post’s “Retirement can get old very fast” Garry Marr discusses  a growing trend “among Canadians who continue to delay retirement — some because they are worried about living longer and running out of money while others just can’t imagine a life not working.” The article touches on a number of issues including: governments being unable to meet the pension promises (e.g. Greece), low pensions (e.g. CPP in Canada), people starting to budget only in retirement, inadequately accounted for longevity risk in financial plans, and others.