Hot Off the Web– December 20, 2010

Personal Finance and Investments

Perkins and Robertson in the Globe and Mail’s “Through Canada’s insurance loophole” describe how “The regular checks and balances that are designed to oversee an insurance agent had failed.” Over the past twenty years the in most instances to historical oversight provided by insurance companies has to a significant extent been replaced by “a middleman company called a Managing General Agent, or MGA, which is an unregulated wholesaler of insurance products to independent agents that few consumers know about.” The result in one instance was that a 96 year old woman was persuaded to cash a $200,000 segregated fund with embedded guarantees and replace it with a questionable investment supposedly run by her insurance agent, who then went bankrupt.

In WSJ’s “Seniors scam seniors”Zweig and Pilon discuss the trend of rising “senior-on-senior financial fraud”. “Elderly investors are natural target in part because they may be more susceptible to fraud.” A combination of decreasing investing ability past age 70, trusting people of similar age as themselves, especially when claiming important sounding professional designations which imply specialization in “seniors”, and products pitched at free “seminars” with free lunch makes seniors easy prey to fraudsters.

In the WSJ’s “Target-date funds add annuities”Anne Tergesen reports on the evolution of target-date default funds associated with 401(k) plans, by the addition of annuities to help employees better manage their longevity risk. Two approaches are mentioned: one whereby  some portion of each dollar invested by the participant goes toward a deferred annuity (typically an increasing amount going to annuities as the individual approaches retirement), and another which uses a variable annuity which includes guarantees as to the minimum level of income to be provided. (These are theoretically good ideas, if they are implemented at a low cost, otherwise beware!)

Jonathan Chevreau in the Financial Post’s “It’s easy: Just stop your spending”reminds his readers that all you need to do is muster up the will power and determination to stop spending, then first pay off your debts and then start building your wealth. With Canadians’ debt hitting record high there is significant exposure that when interest rates rise debt will be even harder to repay.

In the Globe and Mail’s “A taxing dilemma: What goes inside your RRSP?” John Heinzl says that the conventional wisdom of putting your fixed income investments into RRSP, and dividend paying stocks in taxable accounts, is not always the best advice. Heinzl indicates that “with dividend yields these days often substantially higher than interest rates on fixed-income securities, it might be preferable in some cases to put dividend stocks insidethe RRSP, not outside.”

“The Committee for the Fiduciary Standard” provides its definition of the Five Core Fiduciary principles: (1) put client’s interests first, (2) act with prudence; that is, with diligence and good judgement of a professional, (3) do not mislead clients: provide conspicuous, full and fair disclosure of all important facts, (4) avoid conflicts of interest, (5) fully disclose and fairly manage, in the client’s favour, any unavoidable conflicts (Thanks to Ken Kivenko  of Canadian Fund Watchfor recommending article))

Brett Arends in the WSJ’s “How to get financially fit in the New Year”has a list of good suggestions to consider. The list includes: maximize savings (at least 15% of income, and of course contribute at least enough to get the employer’s matching funds), review your 2010 spending to fully understand where to money went and set a new 2011 budget accordingly, no plastic for one month (set weekly budget and cash a check to cover it), review your investments and “put money to better use”, “zap the debt”, review your insurance for unnecessary coverage and shop around for low cost alternatives, and “update your will”.

Real Estate

Patricia Rainey in the Financial Post’s “Where to retire: Florida is most popular state”indicates that “Baby boomers planning to retire and move house could be heading to Florida, which has eight of the 10 most popular cities for U.S. seniors, according to a new poll.” Though the article notes that the vast majority of the seniors tend to stay in place rather than pick up and move.

In the WSJ’s “Fewer homes ‘underwater’ as foreclosures increase” Nick Timiraos writes that the “decline stemmed from banks getting more aggressive on foreclosures, not from home values going up”. In fact they report that home prices “appear to be declining again….(and) another 5% decline in prices would leave an additional 2.4 million homeowners underwater” on top of the 10.8 million at the end of September. (Some great graphs are included showing state by state foreclosure situation.)


Lee Greenberg in the Ottawa Citizen’s “Ontario gives Nortel pensioners more control over their pensions” reports that “Nortel pensioners will now be allowed to invest their pensions with private fund managers, after the Ontario government announced Friday that it will reverse an earlier decision forcing them into a safer – but less profitable – regime… “The ability to opt out of the current wind-up approach would allow pensioners who have a greater risk tolerance to elect to pursue investment strategies that may ultimately lead to higher benefits,” “ (Not clear what this all means in terms of what investment options will be permitted, e.g. whether pensioners will be forced into the waiting arms of the Canadian financial industry or they’ll be permitted to manage the assets in a self-administered plans, no indication of the tax treatment, the funded level of the plan, how the PBGF guarantee will be handled for those choosing to opt-out of the traditional compulsory wind-up. This is potentially exciting news, but I am going to have to reserve my enthusiasm until additional details are released.) Another Nortel pensioner related story is the Ottawa Citizen’s “Nortel pensioners thrown to the wolves”Bert Hill comments on the recent defeat in the Canadian Senate of a proposed enhanced priority to claims of widows and individuals on long term disability in case of sponsor bankruptcy. (Pathetic!)

In the Globe and Mail’s “Flaherty pitches private sector retirement plan” Bill Curry reports on Finance Minister Flaherty about face on pension reform. In June he was pushing the “modest and gradual” expansion of the CPP (which brought little or nothing for the already retired, about to retire or near retirement boomers, but at least it was better than nothing for younger Canadians), and now he rejected that in favour a private sector implementation which effectively hands Canada’s financial institutions tens of billions of dollars on which they can charge their outrageous fees. Curry predicts that the provinces (except Alberta) are planning to continue the fight for the previously agreed expanded CPP. In the Toronto Star’s “Backlash grows against Flaherty’s pension proposal” Brennan and Wittington report on the anger expressed by the Canadian labour movement against the Conservative government’s abandonment of its mid-year expanded  CPP proposal and it’s replacement with a Pooled Registered Pension Plan (PRPP) which would be a voluntary (for employers and employees) participation plan administered by the financial industry. (Mr. Flaherty’s proposal to hand over Canadians’ savings to the Canada’s financial industry, with a history of some of the world’s highest and most corrosive fees, is in line with the Liberals’ recent white paper also suggesting that the private sector would manage the pension assets, except obviously the Flaherty proposal was put together is great haste and containing a lot less substance than the earlier Liberal white paper.)

In the press release “CARP welcomes progress on pension reform-Need clear protections for investors in private-only options”, CARP’s Susan Eng very perceptively states that “Since the proposal rules out a public option, and call for a Defined Contribution approach, CARP will be looking for legislated protections to ensure affordability, benefit adequacy, portability, fiduciary responsibilities, and proper risk management to ensure sustainability” and “This could be a major wind fall for the banks and insurance firms, so called “regulated financial institutions” which will get monopoly access to a major source of new business – so this is the time to stipulate conditions such as regulated fee caps or limitations on risk taking with retirement funds– and all the more reason for the stakeholders that will be consulted on the proposals to include knowledgeable representatives of retirees”

In The Globe and Mail’s “Jim Flaherty draws sharp political arrow from pension quiver” Bruce Anderson tries to convince readers that Mr. Flaherty’s PRPP represents a superior solution to  the previously proposed expanded CPP because it is “better tuned to contemporary sentiment” and the enthusiastic reception by banks, financial institutions and  the Canadian Federation of Independent Business. (This must be a bad joke, unless the industry signs up to management and administration fees of <0.5% and fiduciary relationship to investors). Jack Mintz, however continues to believe that Canada’s pension system is performing well and in the Financial Post he writes that “No surgery is needed” (Of course that no surgery is needed Mr. Mintz, because the patient is dead…see my earlier blog “Jack Mintz: Beware of the super pension fund”-NOT in reference to Jack Mintz’s view that all is well with Canada’s pension system.)

In other pension related news, the federal government announces in “Government of Canada moves to strengthen the Federally regulated  private pension system” new too-little too-late band-aids, which should have been enacted perhaps 15-20 years ago, applicable for the very small proportion of Canada’s private sector pension plans which are federally regulated (like banks, Bell Canada, Air Canada,…) in attempt to suggest to Canadians that decisive action is being taken on the pension front; but few will be fooled. (Thanks to Jim Murta for bringing announcement to my attention.)

I measure every pension reform proposal against how it meets the needs of Canadians on a number of dimensions: mechanism to encourage savings sufficient to meet retirement needs, low cost asset management and administration, fiduciary relationship toward investor, defaults but with some flexibility to match asset allocation to investor risk tolerance, low-cost decumulation strategies including low cost longevity insurance option, regular feedback to investor indicating progress toward retirement goals; and of course no pension reform worth its salt would fail to deal with the protection of already earned private sector DB pension benefits especially for those already retired or within a decade or less to retirement. I haven’t seen any proposal as yet with gets a pass on this scale.

Things to Ponder

David Rosenberg has a scary list of quotes from Bank of Canada Governor Carney’s speech in his December 15th Breakfast with Dave email. The quotes speak of: “extraordinary times”, “crisis is not over”, “continuing “currency tensions”, when low rates start to increase “risk reversals…can be fierce…the greater the complacency, the more brutal the reckoning”, and “now is not the time for complacency”.

The WSJ’s Brett Arends in “Could you retire without Social Security?”argues that “This week’s landmark tax deal sharply changes (for the worse) the financial outlook for Social Security. That has huge implications for your retirement…. cutting payroll taxes for one year, weakens Social Security’s funding. It puts those payroll taxes “in play” as a political football for the first time. And by freezing federal taxes at today’s low rates, it will add at least $900 billion—and probably much more—to our spiraling national debt. That threatens the ultimate financial stability of the federal system.” He points out that market rate to buy a $10,000 annuity for a 66 year old with a 3% a year increase (simulating inflation) would cost $180,000; it would cost $500,000 to buy an annuity for someone eligible for the $28,000 maximum benefit. A fully CPI indexed annuity would cost even more.

To reinforce the risk that the U.S. taking on, in Fortune’s “Moody’s warns on tax cut deal” Colin Barr reports that while tax deal will help economy “unless Congress gets its act together, it could see a once unthinkable downgrade of the U.S. credit rating on its watch, which could balloon U.S. borrowing costs and make our financing position much more costly.”Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years,” Moody’s said. The comment comes as the bond market seems to have reached very much the same conclusion. The yield on the 10-year Treasury has soared to 3.32% from around 2.4% two months ago, as investors bet on a stronger recovery and rising inflation.” (From CFA Financial News Briefs)

Here are a couple similar but different views of long-bonds that you might be interested in reading. First David Rosenberg’s Globe and Mail article entitled “Why I’m still a bull on bonds” and then Avner Mandleman’s “Long bonds? Not yet”; they agree that they may be worth buying but not on the timing. Martin Wolf in the Financial Times’ “Why rising rates are good news”says that rising rates are good news because it means “a move toward normalization”. He quotes one report which suggests that we may be at “the beginning of a secular rise in global real interest rates, as the investment programmes of the emerging world make up a rising share of the world’s demand for capital. If so, yields on government bonds in highly rated high-income countries might end up above 5 per cent in normal conditions… Historically, real interest rates of 3 per cent were normal. Imagine, instead, that they reached as much as 4 per cent. So yields on high-quality bonds might well reach 6 per cent.”  He concludes with “In all, what has happened in bond markets is encouraging. Rates are rising, as depression psychology dwindles. With luck, the recovery is going to take hold.” (Not exactly aligned with the other views.)

Burton Malkiel writes in the WSJ’s “Why investors need China in their portfolios” that “one of the most common mistakes detracting from investment performance is the ‘home country bias’ that afflicts both individual and institutional investors”. He argues that with U.S. now having about 20% of the world’s GDP, and all developed countries together about 50%, it makes no sense to ignore developing countries especially China which represents about 10% of the world’s GDP based on PPP and is growing at about 10% a year. He points out that historically high growth rates do not necessarily translate into high investment returns, but “poor periods for equities always followed periods of excessive common-stock valuations” and Chinese equities today are reasonably priced.”

Jonathan Davis in the Financial Times’ “A little history to shed light in bonds” looks at some history; specifically when in 1994 several banks and hedge funds lost billions of dollars “when bond markets cracked in spectacular fashion”. Davis concludes with: “Of course there are many differences between 1994 and 2010, but with bond yields already so much lower than they were then, a great 28-year bull market in bonds in its dying throes, and inflationary pressures building, unless leverage and herding behaviour have suddenly become a thing of the past, no investor should be surprised to find that bond markets are vulnerable to sharp and painful adjustments, of which last week’s movements are a foretaste.”

In the Globe and Mail’s “Canadians’ borrowing in ‘uncharted territory’: Carney” the Governor of bank of Canada “the risks associated with the level of debt households are carrying is something that “we all have to take seriously”; Mr. Carney is concerned about the vulnerabilities of many households to higher interest rates. However according to Michael Babad’s Globe and Mail article “Personal debt not as bad as it looks: BMO” a BMO study suggests that things are not that dire if you consider that “net financial assets as a share of disposable income smoothed over a five year period” has been increasing as `

In the NYT’s “A secretive banking elite rules derivatives trading” Louise Story does a scary exposition about a secretive group of bankers (to the exclusion of other banks) which oversees the trading of derivatives and indicates that “Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small…”  (Thanks to VP for recommending the article.) And in a related Financial Times article “So what’s become of credit derivatives”John Dizard argues that “Society would be better off removing the artificial barriers to transparent price discovery for and broad distribution of the actual loans and bonds. The underlying credits should have transparent, publicly available fundamental data and analytics. Buying and selling small lots of credit slices should be easy. The markets should be democratised, not further concentrated into oligopolies through rigged “reform”.”

And finally, Tim Blackwell in the National Post’s “Ontario told to pay for U.S. surgery” recounts the story of an Ontarian who after “suffering headaches, vomiting and imbalance…was diagnosed with bleeding on the brain…was given an “urgent” follow-up appointment with a neurosurgeon – three days later.” He decided to get a second opinion in Buffalo the same day and was immediately rushed into the OR. Even though treatment in the U.S. was not pre-approved by Ontario, he won re-imbursement after a one year battle with OHIP.


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