Hot Off the Web- July 23, 2009

Personal Finance and Investments

WSJ’s Andrea Coombs discusses the need for not just managing all the passwords that we use for our online financial information but to consider what happens if you die in “You need an online estate plan”. “That’s all well and good while you’re alive. But your admirable devotion to protecting sensitive personal data can wreak havoc for your heirs after you die.” She suggests: giving lists to lawyer/trusted-relative/safety-deposit( with somebody who has key) or an online service like Legacy Locker which stores access info for your accounts and sends the info to designated individuals in case of your death. (I haven’t tried the service mentioned, but thought about how you spouse/family will access your online financial information deserves some thought.)

Leslie Scism in WSJ’s “Long derided, this investment now looks wise” certainly touched a raw nerve with the suggestion that variable annuities with guarantees have a useful place in portfolios. These products didn’t make sense before and they still don’t make sense for investors. This is like arguing that if I had invested in CD/GICs instead of the market, then I would have been much better off after last year’s market crash! The bottom line in these variable annuities is that you’d do better with an immediate annuity (you get more income) or a CD/GIC (you keep your principal), because these products have very low probability of upside potential. See my analysis at GMWB II. In fact these are potentially lose-lose products when there is a market crash (like last year); insurance company keeps paying the guaranteed income even though assets have gone through the floor and investor loses her residual assets (just as in the case of annuities but gets lower income than annuities would have delivered.)

We next have three articles using lists to get their messages across: how to select ETFs, decide on life insurance and firing your financial advisor.

First Rob Carrick in Globe and Mail’s “Too many ETFs, too little time” looks at ways to cut through the selection process among 1700 ETFs. The sieves suggested are: (1) fees (cheapest), (2) trading volume (>100K/day), (3) broad diversification, (4) indexing (market cap weighted), (5) currency hedging (no, except for funds that you’ll need in next 3-5 years, but then they shouldn’t be in equities anyways.)

The next list is also in the Globe, this time it is Tim Cestnick’s “Five reasons to be nice to your insurance agent”. Perhaps more appropriately titled as the five reasons to buy life insurance, his list is: (1) provide for dependents/charities, (2) final disbursements (burial, fees, taxes, debt,..), (3)bequests, (4) shelter income from tax (I am not convinced), (5) protect business/partner

And the third list is in Yahoo Finance where Ron Legge discusses the “5 reasons to fire your financial advisor”. The reasons listed are: (1) advisor has legal problems, (2) not executing investment plan ( compare to benchmarks), (3) questionable credentials, (4) divergent philosophy (doesn’t care about costs, taxes,..), (5) no accountability

In the Financial Post’s “It pays to get a second opinion”, Bill Hanley encourages readers to get a second opinion about the investment advice that they are getting. He elaborates with the example of Warren MacKenzie who built a business around providing second opinion. “For a portfolio check and new financial plan, Second Opinion charges an average fee of $1,900.” He also is prepared to do an advisor search if the client so desires. (Sounds like a great business model and given that considerable money is involved not a bad thing to do for the investor.( By the way a few months ago I reviewed Mackenzie and Hawkins’s “New Rules of Retirement: What your financial advisor isn’t telling you”)

After last week’s article in the WSJ where Brett Arends encouraged readers to get immediate annuities, he received unsolicited input from various advisors (including yours truly) about better options like longevity insurance. So this week in “Making annuities work for you- and your heirs”  he writes that “A number of advisers suggested longevity insurance as an alternative, an intriguing option. Longevity insurance, a relatively new product, is effectively an annuity that begins paying out only if you live past age 85. (According to MetLife, which offers the product, a 65-year-old man could pay about $115,000 and receive an annual income of $100,000 when the policy kicks in 20 years later.) Longevity insurance could let you retain control of your investments, finance your retirement for a set number of years and live without worrying about outliving your capital.” (Unfortunately, not yet available in Canada. Pity!)

In the NYT’s “Envisioning retirement, with a backup plan”, given all of life’s uncertainties, Jeff Brown discusses ‘Plan D’ whereby “Everyone should have an ultimate fallback, the cheapest retirement plan that would make you happy.” (Not a bad idea!)

For American readers, Ron Lieber’s NYT article “Converting an IRA into Roth? How is your crystal ball?” looks at the opportunity and considerations associated with converting 401(k) (like and RRSP) to Roth IRA (like a TFSA). He discusses the risks in rule changes, tax rate changes, etc. He also mentions the important consideration of “tax diversification in the same way you think about asset allocation. It’s about spreading your risk — and your money.”

In the Financial Post’s “Is working just a few more years a panacea for 2008’s losses?” Jonathan Chevreau writes that “a study by the Employee Benefits Research Institute says there’s a major gap between the age people think they’re going to retire and the age they actually do retire at. Due to various circumstances often involving other people, people do retire a bit earlier than they intended. Some 42% cited their own poor health or disability, 18% cited a spouse or parent’s condition, and a third mentioned corporate layoffs or other employer-related issues.”

In Financial Post’s “Parenting your parents” Jonathan Chevreau looks suggests that unlike the commonly thought windfall inheritances that boomers might be getting , they may in fact end up having to support their parents in their old age. He quotes a spokesperson for a recent survey published by BMO that, (referring to baby boomers),“Not only do they have to figure out what will help their parents, but they also need to learn how to make certain their parents are happy to accept the help when they need it.”

Pensions

Benefits Canada’s Jody White reports in “New limits on Ontario commuted value transfers” that FSCO has issued new rules whereby “if the plan’s transfer ratio has dropped by 10% or more and is below 0.9, they must get approval from the superintendent before allowing terminating members to transfer their commuted value (CV) or buy an annuity.” And that the “notice adds that all plans must develop a process to monitor their transfer ratios, and plans that have not yet prepared an actuarial valuation reflecting the market losses in 2008 should take immediate steps to estimate their current transfer ratio. “ (The only thing I can add to this is, “it’s about time”, even though many of the horses left the barn, with unrecoverable funds being taken away making the pension fund even more underfunded. Nortel was paying commuted values of 100% until bankruptcy protection started in January, then 86% until end of May, now 69%…truly amazing that the FSCO has not stepped in earlier. . It was irresponsible of Nortel, the FSCO, the custodian and others in the know to allow this to happen. In my mind no CVs for pension plans with sponsor in bankruptcy protection makes sense. What we now need is that on windup CVs to be available to pensioners, just as they are for non-pensioners.)

The other Nortel pension related story is that in the US the Pension Benefit Guaranty Corporation has taken over the Nortel US pension plan as announced in “PBGC moves to protect pensions at Nortel Networks Inc”; you will note that the funded status of the plan is 58% (not 69% as claimed for the Canadian plans), but US pensioners are guaranteed pensions up to $54,000 annually if the are at least 65 years old. Previously, the UK has also taken over Nortel’s UK pensions as reported in   “Nortel UK Pensions” with even more generous guarantees than in the US. However,  there is “Uncertainty in Canada after US government agency steps in”; here only Ontario has any guarantees and that is only guaranty for pension value of $1000/mo. (Amazing! If we read this about Mugabe’s Zimbabwe, you might believe it; but this is Harper’s, and our, Canada. Pity. Don’t you believe that it can’t happen to you is you have a private sector pension. What are you going to do about it?)

Real estate

The debate continues if US real estate prices are bottoming or not. WSJ’s Hagerty has some interesting statistics based on realtor data in “Home sales, All over the map” ; volume is up, but the bottoming and recovery process is dependent on location (as it usually is with real estate.) Financial Times’ Alan Rappeport in “Signs of life in US housing market” writes about Federal Housing Finance Agency based data showing 0.9% rise in April to May US housing prices.

We’ll have more data next week when the latest Case-Shiller (US) and Teranet-National Bank of Canada housing indexes will be available.

Things to ponder

You are no doubt still wondering: Inflation? Deflation? Stagflation? We have three articles expressing an opinion. First the Financial Post’s Diane Francis in “The audacity of hyperinflation” reports John Ing’s view that “We continue to believe that gold will hit US$2,000 an ounce this year.” James Barty in Financial Times’ “Long road back to normality” argues his way in-between inflation and deflation to “a subpar recovery…. Together with large amounts of spare capacity this likely means inflation will remain very subdued, possibly close to zero, although outright deflation (which we would define as permanently falling prices) is also unlikely.” And “that means that yield is the asset class to go after. Corporate bonds and equities with strong balance sheets and dividend yields would seem to be a sensible combination of assets for a conservative investor in such an environment”. Rob Carrick writes in Globe and Mail’s “Deflation?  Statscan hasn’t seen my bills”  that he hasn’t noticed any deflation in the basket of goods that he is buying. Carrick then refers his readers to Sprott’s depressing piece “It’s the real economy, stupid”that starts off with “We are now in the early stages of a depression”; then produces pages and pages of economic data and comparing it to 1929 and then closes off with “In our view, the only thing propping this market up is investor sentiment. Earnings have not

improved.”

The Financial Times’ Paul de Grauwe argues that “Economics is in crisis: it is time for a profound revamp” Interesting reading which he closes off with “macroeconomists can calculate the motions of a lonely rational agent but not the madness of the crowds. Yet if macroeconomics wants to become relevant again, its practitioners will have to start calculating this madness. It is going to be difficult, but that is no excuse not to try.”

Pauline Skypala in the Financial Times’ “Arguments over engaging shareholders”questions if the current approach of fund managers trying to time the market may not be the best way to add value for their investors; more value would be added if they engaged the management of the companies that they invest in. ““The notion that consistently successful market timing of stock transactions outweighs any potential benefits from appropriate engagement activity seems highly implausible.”Perhaps Sir David is as sceptical about the value of much investment management activity as I am and wants to see providers of capital to companies take a much longer term interest in those companies. This would imply a major change of emphasis by managers, who would have to become committed owners, on behalf of investors, and look to make money by identifying companies they are convinced are run for the long-term interests of shareholders.“

And finally, a cute joke, with more than an element of truth to it ,is the anonymously authored “Understandable explanation of derivative markets” which explains background of how we got to this point with the vivid story of a successful Detroit bar owner….but you can read this yourself for a chuckle and some education. (Thanks to AR for pointing out the story to me.)