Hot Off the Web- July 25, 2011

Personal Finance and Investments

In WSJ SmartMoney’s “Is your adviser more aggressive than you realize?” reports good and bad news, about advisors, which emerged from a study by the Financial Planning Association entitled “Trends in Investing”. First the bad news:  “that 67% of surveyed advisers believe that “active management,” as opposed to “passive management,” provides “the best overall investment performance.””. The good news is that “When advisers were asked to identify the five most important criteria they use to evaluate specific funds for clients’ portfolios, the most important measurement – in 64.5% of responses – was expense ratios”. (Well, sort of good news, more than 65% of advisors should know that. The results of this survey are actually scary! Thanks to CFA Institute NewsBriefs for recommending.)

In the Macleans article “Stealing from mom and dad” Risha Gotlieb discusses “why power-of-attorney abuse against seniors is soaring- and so easy to get away with”. “Having a senior declared incompetent is a commonly used legal manoeuvre by POA abusers to nullify the senior’s ability to make choices for themselves, including revoking the POA …the most conservative statistics suggest one in 12 older Canadians are abused or neglected, with the most commonly reported type of abuse being financial…There is currently no meaningful oversight over POAs’ actions…” (The article then continues with some suggestions on combating abuse by some mechanisms which might be considered self-serving given the source. No doubt there is risk of abuse by POA, but there is also risk of abuse by professionals advising elderly. Some of the proposed ‘solutions’ might prevent POA from doing the right thing for the elderly needing help (e.g. moving her closer to family, getting additional care for person who really needs it, moving assets away from ‘advisor’ who might be bilking/milking senior via high fees and/or inappropriate investments…there must be better solutions than those proposed…Thanks to GT for recommending)

Jack Willoughby in the Barron’s “Five queries for ETFs” discusses the issues associated with ETF proliferation “many of them offering obscure indexes and features using swaps and derivatives that a lot of retail investors (and even their advisors, see next story) don’t understand.  Before investing in an ETF he suggests that you should ask at least these five questions: (1) Is the ETFF a ‘classic’ or traditional one (consisting of a package of stocks and bond moving in line with the specified index) or does it hold derivatives (the extreme case being synthetic ETF/ETNs holding derivatives exclusively), (2) “what are my credit risks?” (e.g. counterparty risk when derivatives are being used or ETN where sponsor acts as counterparty or guarantor.), (3) “what if any swaps or futures markets will I be exposed to?” (e.g. in the case of commodity tracking index funds), (4) How big is the ETF or ETN I’m investing in? (e.g. funds with assets < $100M unlikely to be profitable for sponsor and he may pull plug, or tracking error issues or low liquidity < 50,000 shares trading/day.), and (5) for tax purposes, what kind of structure is this ETF?” (e.g. gold bullion funds can be taxed like collectibles, or if funds qualify as partnerships there are more complicated tax issues.) “They (traditional ETFs) remain attractive low-cost investment vehicles that provide intraday pricing, liquidity and lots of flexibility. But it pays to ask about the risks before you buy. “

Speaking of ETFs which even the advisors didn’t understand, Bloomberg News reports that “Massachusetts sues RBC over ETFs”. The funds in question were leveraged and inverse ETFs sold to investors “after the Financial Industry Regulatory Authority said that such products might not be a good fit for long-term investors. Leveraged ETFs use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark”  “The point of the complaint is not that the investors lost money,” Galvin said in the statement. “The dishonesty here is that the investors, and indeed the agent soliciting their investment, did not understand the workings of these funds.”

In AdvisorOne’s “What behavioural finance teaches on how to discuss risk with clients” Mike Henkel writes that “The lessons of behavioral finance: avoid focusing on short-term volatility when the objective is long-term growth…for certain investors-namely, retirees and those approaching retirement- heightened attention to portfolio risk reduction is justified…for those with longer time horizons, too much volatility management can prevent the accumulation of funds needed to retire in the first place…discussing volatility too often can backfire.” (i.e. remember, what makes (near-)retirees less risk tolerant is not age but the (imminent or in progress) regular withdrawals necessary, to meet expenses, which will aggravate any bad portfolio returns and potentially seriously deplete one’s assets; this is not an issue for people ten or more years from retirement Thanks to CFA Institute Financial NewsBriefs for recommending) In a related article the Globe and Mail’s “Some financial plans lack realistic projections”Preet Banerjee reminds readers about the impact of the so called sequence-of-returns problem; i.e.  the impact of a bad sequence losses at the same time as withdrawing assets annually to meet retirement spending needs, especially when this happens early in retirement.

Glenn Ruffenach in WSJ SmartMoney’s “Retirement: It’s not all a crapshoot” writes that “You have more control over your future than you think”. He suggests five key steps: (1) setting a budget determines the “number”, i.e. the level of assets you should be aiming for, (2) timing of social security, i.e. starting at age 62 is unlikely to be the best for most individuals, (3) reducing debt (eliminating is even better), (4) creating a pension, i.e. if you don’t have one considering annuities, bond funds and dividend-paying stocks and (5) planning for long-term care by insuring or self-insuring. Ruffenach concludes that “I don’t have time” is a lame excuse and “You can find time. Take control of what you can control — and take the anxiety out of your retirement planning.”

Kelly Greene in the WSJ’s “PINs that needle families” discusses the importance of “Taking 15 minutes now to jot down your online passwords could save your family hours of frustration after you are gone. She mentions some examples of other items that should be included in addition to PINs such as those listed at Letter of final instruction. Also mentioned is the availability of digital estate planning services such as DataInherit, Entrustet and Legacy Locker (none of which I have experience with) but the article does not appear to endorse such an online approach. “So, where should you keep your passwords, if not online? Ms. Harrington says she writes them down on paper and tells her family where to find them. It doesn’t make sense to stow them in a bank safe-deposit box, she adds, because passwords need to be updated frequently… What if a family member dies before leaving you a list of user names and passwords to online accounts? The rules for getting any sort of access to the content inside of them vary widely…”  For example “people who use Yahoo agree to a “non-transferability clause.” If representatives of a deceased user contact Yahoo, it may close the account… Google sometimes allows an authorized representative of a deceased user to access email. First it requires a death certificate and other information; if it gives the go-ahead, the representative would need to get a court order or submit additional materials.” (The article is a good reminder about the importance of dealing with this issue, whatever mechanism you ultimately choose.)

Real Estate

In the Financial Post’s “Buying a house in the U.S.? The IRS wants to know”William Hanley reminds Canadians tempted by high Canadian dollar coupled with U.S. real estate prices which dropped in some areas 50% from the peak, that in addition to many other reasons for caution, H&R Block “raised another warning flag, cautioning that purchasing property south of the border could trigger all kinds of tax implications – especially income tax issues – in both countries.” Some items mentioned include U.S. reporting requirements related to a mixture of house ownership, time spent in the U.S., taxes when you receive rental income,  taxes due when you sell the home, whether you can renovate your U.S. home yourself or not, federal and state taxes. Hanley certainly makes you think about the “big headaches” associated with U.S. property ownership. (He didn’t even mention estate tax issues and discriminatory property tax issues in Florida; it sure makes one wonder if the Americans really want Canadians to invest in the U.S.?)

Wesley Lowery in the WSJ’s “Home resales dip again” reports that “Existing-home sales in June fell to a seven-month low, and the number of contract cancellations soared, signaling that buyers are rethinking home purchases amid national economic uncertainty… Sales were down 5.2% in the Northeast and 1.7% in the West, while other regions saw modest gains; sales were up 0.5% in the South and 1% in the Midwest. A separate report released Wednesday showed one bright spot for sales was Florida. Second-quarter home sales in Miami were up 13.5% from last year, and hit a five-year high…” Some reasons mentioned to the higher than normal level of buyers pulling out at the last minutes concerns about the economy, debt ceiling debates, and “tight credit and low appraisals”.

In Bloomberg’s “U.S. moves toward ‘rentership society’ Morgan Stanley says”John Gittelsohn reports that “The national (home ownership) rate, which stood at 66.4 percent at March 31, would be 59.7 percent without an estimated 7.5 million delinquent homeowners who may be forced into renting, according to Morgan Stanley analysts led by Oliver Chang. The lowest U.S. homeownership rate on record was 62.9 percent in 1965…The homeownership rate reached an all-time high of 69.2 percent in 2004 as relaxed lending standards fueled home sales and President George W. Bush promoted an “ownership society.” Mortgage delinquencies, foreclosures and tighter credit for housing loans are reducing property buying…The shift provides opportunities for builders of multifamily homes and investors in single-family houses leased to renters…The U.S. apartment vacancy rate fell to 6 percent in the second quarter, the lowest in more than three years”.

In WSJ’s “Vacation homes: Why it may be time to buy” quoting real estate agent sources Jessica Silver-Greenberg writes that “The clouds hanging over upscale vacation-home markets are starting to lift. While prices are still falling in most regions, the luxury segment is picking up, and brokers are reporting more inquiries than they have had in years. The upshot: If you have the money and plan on staying put for the long term, now may be a good time to buy.” The writer discusses possible areas where opportunities might beckon such as the Hamptons, Hilton Head, Santa Monica, and Aspen, as opposed to areas still lingering like Miami, Vail, Palm Beach and Martha’s Vineyard. (Perhaps, or perhaps not. I’d be very apprehensive considering a vacation home as an investment, given costs associated with them. If it is personal use property and you can afford the expense…and this is where you want to spend your money, that a different story.)

Tim Cestnick in the Globe and Mail’s “Talk to kids before leaving them your cottage” discusses how not to leave your cottage to your kids.


First an update for Nortel pensioners. If you missed last Friday’s webinar the slides are available at Pension Plan Cutbacks. While many questions were answered, some important ones were not and some new ones popped up. I left the webinar feeling uneasier than before it: (1) one of my original questions had to do with how the PBGF top-up was to be calculated…i.e. whether the top-up was $300 or $410 per month? (2) but listening to the presentation, specifically the calculation of how the un-indexed 70% funded level was arrived at, from the 59%  actual funded level using the overall plan level rather than by age, that suggests that the youngest pensioners under the average age of the plan (age 74) will be significantly short-changed on top of the fact that they were already in serious jeopardy due to the minimal/partial indexation provided by the original pension, and (3) the fact that they immunized (applied complete asset/liability matching by moving 100% into fixed income securities (provincial bonds) the plan exposes to significant interest rate risk the commuted value of all current and future pensioners who are considering to take the LIF option. If that’s the law, perhaps it should be changed; but I can’t even find any references anywhere to these laws which describes/guides operationalization of these points. If any of you seen references to legislation/regulation on these topics I would appreciate hearing about it.

In the Financial Post’s “Compelling advantages of PRPPs” Jonathan Chevreau writes that Ted Menzies, the government’s point man for PRPPs sings its praises that “… 60% of Canadians lack employer pensions, most of them working for small or medium-sized enterprises. Many typically change jobs every three or four years so the portable feature of the PRPP is “tailored for them…They will be efficiently managed, privately administered pension arrangements that will provide greater choice to both employers and individuals…“With group RRSPs, the fiduciary responsibility is on the employer, which concerns smaller employers.” …“The administrative cost to set it up will be very low because it will be provided by a plan provider… employer will simply have the same process as deducting for the Canada Pension Plan. It has to remain simple for employers to adopt it.” …“A number of existing insurance companies and big pension fund managers already have people in place to do that (run the plans).”… provinces have the jurisdiction to make PRPPs mandatory or make them auto-enrolled plans. Similarly, when it comes to employers “matching” the contributions of employees, he said “we’re trying to make as much optional as we can”” (So how does the PRPP meet what I consider the four necessary criteria to heal Canada’s systemic pension crisis, discussed some months ago in the PRPP (Pooled Retirement Pension Plan blog? (1) “encouraging” more saving? (probably, though even this is not clear due to lack of specifics), (2) low-cost investments (TBD- but given the history of Canada’s financial services industry, this is unlikely to be the case), (3) low-cost longevity insurance (Not even mentioned), and (4) protection of already earned DB plan benefits for current private sector DB plan beneficiaries in case of sponsor bankruptcy- NO). That’s perhaps a score of 1 out of the required 4, so far; not very encouraging.) Chevreau also discusses the topic in “Liberals accuse Tories of “caving” to banks & insurance firms on pension reform” (More stories, studies, posturing and inaction; Canadians better take personal action on their retirement now; it is best expect nothing from pension reform and you won’t be disappointed.)

Things to Ponder

Jason Zweig in the WSJ’s “Forget about Black Swans, the one floating ahead is neon” writes that never mind black swans, those “unthinkably rare, immensely important, and as unpredictable in advance as they are inevitable in hindsight”. Instead he suggests we pay more attention to the neon swans, “an event that is unthinkably rare, immensely important and blindingly obvious”, like the possible downgrade or default of U.S. Treasuries. If this neon swan materializes, it could lead plummeting bond and stock prices. Zweig says that our human minds may not only unable to “prepare us for rare, important and unpredictable events. But maybe our minds—and our markets—aren’t very well equipped to protect us against neon swans, either. Many investors seem to be coping with what seems like an obvious risk simply by closing their eyes.” But the reality is that there is little investor can do when the “yardstick measuring the risk of most other securities…is lost”. If the unthinkable happens and markets swoon should a default occur, those sitting on cash may have a “historic buying opportunity”. “It is important not to be complacent. If you are blindsided by bad news that was staring you in the face for weeks before it came to pass, you will feel like a fool. On the other hand, the forces that do the worst damage to markets “are never the ones that you think are going to get you,” Mr. Bernstein says. Waiting may well be the wisest course this time. You don’t want to ignore a neon swan, but you don’t want to overreact to it only to have it swim quietly away.”

The Financial Times’ Lex column “Geenback’s birthday” writes that “The US dollar, which turned 150 this week, is finally starting to act its age…Today, the greenback is the primary reserve currency, largely due to tradition and lack of alternatives. With traders unwilling to bet on the troubled euro and unable to bet against the renminbi, gold’s nominal record in dollar terms this week shows unease about the dollar’s long-term strength… Now old and frail, the dollar is worryingly vulnerable to a nasty fall.” (Niall Ferguson observed a couple of years ago that there is a debt explosion in the developed world and historically there are only three ways out: cut, print or default; only Britain (1815-1914) succeeded to escape debt through economic growth due to the industrial revolution and because property owners were actually governing. Right now the U.S. is struggling to decide which of the three approaches to use. He also argued, in “The ascent of Money” that reasons why Germany went into hyperinflation after WWI, whereas London did not all related to bond market and nature of debt used by each. More importantly, that inflation is a monetary phenomenon (Friedman), but hyperinflation is a political one (essentially a confiscation of assets by the government as it wipes out all internal debt, equivalent to a tax on bondholders and those living on fixed cash income, like pensioners; entrepreneurs were able to adjust prices.) Also explains how Argentina descended into poverty from being one of the wealthiest countries in 1913.)

Mid-last week Kim Covert in the Financial Post’s “Consumers shop around as prices rise” writes that “The latest consumer price index from Statistics Canada showed the inflation rate hit an eight-year high of 3.7% in May, driven by a 29.5% jump in the price of gasoline and a 4.2% increase in food prices (That shouldn’t be a problem for retirees, since they don’t eat or drive, and interest income between 1-3% for GICs before taxes can more than cover their rapidly growing expenses. J) But then we got some ‘good’ news on Friday indicating according to the Globe and Mail that “Inflation unexpectedly tame in June”. “…much of the drop in the rate from June was due to lower prices for passenger vehicles because of manufacturers’ discounts and lower costs for travel accommodation”. (No problem, Canadians who can’t afford the higher food and energy prices, can just switch buying preferences to new cars and travelling more J. Are we looking at meaningful inflation metrics? And, we now consider 3.1% ‘tame’ (admittedly about 0.5-0.6% is attributed to the introduction of HST last July)? Was not the Bank of Canada inflation target not 2%? Oh yes, but as the Bank’s website indicates “This target is expressed in terms of total CPI inflation, but the Bank uses a measure of ‘core inflation’ as an operational guide.” Not sure what your perception is, but the stuff we are buying feels like is rising at a faster rate.) On the same topic of inflation (or perhaps deflation) is Jonathan Chevreau’s article “Investing in a”in which he also discusses what you might invest in depending in what you believe the future might hold, but be careful about your predictions, just in case you’re wrong.)

Ben Levinsohn in WSJ’s “Why gold won’t soon crash” writes that despite fears by some that gold might crash “…some market watchers say the reasons to own gold may be getting stronger… Cash earns nothing… (and) The only thing worse than earning nothing on your cash is having its purchasing power go down if the dollar shrivels in value…” He then lists some of the signs to watch that “the rally has lost its legs”: very rapid rise in prices (in 1980 price doubled in under two months), rising “real rates”, “If the amount of gold in ETF assets plunges, investors should head for the exits” (now 2155 tons vs. 2106 a year ago), watch percentage of  Asian (China and India  specifically) purchases as a percent of total (58% in Q1’11 vs. 34% five years ago.

In the WSJ’s “A Dodd-Frank retreat deserves a veto” U.S. Treasury secretary Tim Geithner writes that “As we move forward, however, many of those who fought reform during the legislative process are now trying to slow down and weaken rules, starve regulatory agencies of resources, and block nominations so that they can ultimately kill reform. We will not let that happen. Too many Americans are still suffering from the pain of the financial crisis. We owe them a financial system with better protections against abuse and catastrophic risk. As secretary of the Treasury, I will recommend that the president veto any legislation passed by Congress that would undermine these vital financial protections.” (Dodd-Frank is now one year old, and watching the wrangling over necessary regulatory changes no doubt makes many wonder about the next financial crisis and whether politicians have forgotten what they have been elected for.)

And finally, in the Financial Post’s

“Destroying itself from within” Rex Murphy writes that “If America falls, it will not be from external enemies. It will be by her own hand. That is the inescapable conclusion one carries away from a reading of Reckless Endangerment, an account of the ferocious financial crisis that exploded in 2008 and through which, to this very day, the United States is still struggling to find safe and solid ground. It surely isn’t over yet.”  In his review of Morgenson and Rosner’s book “Reckless Endangerment” he comments that “Any person with a regard for the United States, or with some surviving faith in the virtues of representative democracy, will finish this book severely angry…. (and this) is more a story of democracy corrupted than it is a story of financial fraud. It is a story of America’s great wounding of herself.  ” (I’ll have to add to my reading list, though it sounds very depressing. Thanks to RC for recommending)


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