Globe and Mail’s Rob Carrick in “Fee-based accounts also subject to abuse” explains how fee-based compensation (i.e. based on some percent of the assets under management versus commissions on sale of investments), introduced as a means to eliminate conflict in objectives between investors and advisors, has not done the job. He gives examples of abuses, such as: (1) wrap accounts based on funds from only one company, (2) inappropriateness for accounts with low levels of trading, where brokerage fees may actually be significantly lower than asset-based fees. Rob’s conclusion is to “put integrity at top of your list of requirements in finding an advisor”.

Still on the topic of advisor’s fees, Jon Chevreau in Financial Post’s “Fee-only pioneers keep time”  discusses the fee-only (vs. the fee-based) advisor model . In the fee-only model the advisor is compensated on an hourly basis (typically $150-250). He gives E.E.S. http://www.eesfinancial.com of Markham, Ont. as an example. He suggests that a fee-only advisor model may get around the conflict in objectives mention above. Fee-only model may result in significantly different recommendations than a fee-based one, such as: (1) stay with employer pension, rather than cash out (and increase assets under management), (2) pay down debt, rather than increase leverage on investment by borrowing from home equity.

In Financial Post’s “Are there any secrets left?”  Jon Chevreau mentions three recent books related to financial planning and taxes that you may find of interest: (1) Paul and Philippe DioGuardi’s “The Taxman is Watching”, (2) Tim Cestnick’s “101 Tax Secrets for Canadians” and (3) Vlad Trklja’s “Tax tips and Shelters for Canadians”.

Tim Cestnick tells you how to “Put dollars in your pocket by avoiding these costly mistakes” . An excellent example is the case where those who have employer stock options, choose to exercise and hold the stock. At the point of exercise you effectively pay tax on the difference between the exercise price and the market value at employment income rates. However if the stock drops after acquisition you cannot reduce your income by the loss. His advice is to exercise when you want to sell (and of course, prior to expiration).

Globe and Mail reports that “Canadian pension funds log three quarters of losses” . The combination of 11.9% loss in MSCI World Index and the ameliorating effect of the weakening of the Canadian dollar still left Canadian Pension funds, monitored by RBC Dexia, 2.7% below year ago level. The opacity of the pension reporting requirements in Canada will likely give you little visibility of the real state of you defined benefit plan, if you are still fortunate enough to have one).

Rob Arnott in Financial Times’ “Euphemism that became a serious investing proposition”  discusses emerging markets. He stresses that emerging markets are not monolithic; neither politically nor economically. While people in post are doing better than ten years ago, that’s not the case in Zimbabwe and Venezuela. The one thing they all have in common is that their peoples are all striving to improve their standard of living and to a significant extent many are succeeding (though some of the poorest ones are now hit hard by rapidly rising prices of agricultural products). Implications for investors are numerous. This trend will continue to drive the upward trend of demand driven commodity prices, even if the prices will hit the occasional air pocket. There is also a growing correlation between emerging markets and developing markets, though emerging markets are priced at “expectations of either higher future growth or lower future risk, or both”. Also, emerging market bonds are now priced at a reduced risk premium of 3% over developed market bonds, versus previous 6%; however many of these countries have both/either current account surpluses and/or commodity resources. So rob Arnott’s conclusion is that you should still use emerging market stocks as diversification vehicles, but you should also consider their bonds. (The way I cover the emerging market bond asset class in my portfolio is via closed-end funds such as TEI (Templeton emerging markets income) yielding 6.7% (at a 1.84% premium yesterday) and MSD (Morgan Stanley emerging markets) yielding 6.37% (at a 12.7% discount, perhaps because it has an 8.5% Venezuela content according to etfconnect.com).

Rob Arnott’s “Volatility is a faithful friend of the long-term investor” , is another of his recent Financial Times articles that you may find interesting. He argues that while falling asset prices are a problem for post-retirement investors, they are actually an opportunity for younger long-term investors who are net buyers of equities; they are basically getting assets at a discount. In fact he provides statistics which show that returns on U.S. equities in periods of high volatility (>15%) were in the 15% range, whereas during periods of lower volatility (<15%) they were in the 6% range.

Mark Hulbert in the NYT’s “The odds for a retirement nest egg, recalculated”  discusses the recently published research paper of Schleef and Eisinger entitled “Hitting or missing the retirement target: Comparing contribution and asset allocation schemes of simulated portfolios”. Their conclusion is that the rather than adjusting asset allocation with age (i.e. much higher equity content for a 25 year old than a 45 year old) as advocated by financial planners and as implemented in newly introduced target-date funds, one should hold asset allocation constant, consistent with the upper end of their risk tolerance. This appears result in a higher probability of achieving one’s financial objectives. (They do not recommend continuing the same post-retirement allocation, but they planned research in this area. I wouldn’t be surprised if they concluded that post-retirement one should also have a fixed asset allocation, though perhaps different than pre-retirement- but that’s another topic for a future blog)
Finally, Adrian Mastracci has “A simple guide to estate planning”  that you may wish to read in the Financial Post. He discusses wills, power of attorney, all the way to using trusts, such as “testamentary” and “inter vivos“, and some pitfalls.