Hot Off the Web- April 2, 2012

Topics: Advisor fees-conflicts-‘regulation’, ETNs? mortgage rate stress test, Chevreau moving. House prices: US down and Canada up, global house prices, OAS moves to 67, Ontario pans PRPP, equities vs. bonds, your advisor a lemon?

Personal Finance and Investments

In the Globe and Mail’s “Revealed the lowdown on advisor fees” Rob Carrick quotes fee data from “PriceMetrix Inc., which collects data in the advisory business and uses it to help advisers run their businesses more profitably”.  The data suggests that for a $100,000 account fees average 0.9% and 1.61% at commission- and asset- based accounts, whereas for $1,000,000 accounts it is 0.66% and 0.93% respectively.  Pre-emptively, Rob indicates that “I’m sure to run into trouble with investor advocates who object to my use of the term “adviser.” They argue that too many advisers are just investment sales people who don’t provide advice. The advocates have a point.” He then suggests some tests to what you are getting for your fees (e.g.   Financial plan?) (I guess you could ask about the purpose of the fee survey quoted if you don’t know what you get for the fee.)

In the WSJ blog “What would Graham say about Goldman” Jason Zweig quotes from Benjamin Graham’s 1940 book Security Analysis as follows: “An institution with securities of its own to sell cannot be looked to for entirely impartial guidance. However ethical its aims may be, the compelling force of self-interest is bound to affect its judgment. This is particularly true when the advice is supplied by a bond salesman whose livelihood depends upon persuading his customers to buy the securities that his firm has ‘on its shelves’….[T]he sale of securities is not a profession but a business, and is necessarily carried on as such. While in the typical transaction it is to the advantage of the seller to give the buyer full value and satisfaction, conditions may arise in which their interests are in serious conflict. Hence it is impracticable, and in a sense unfair, to require investment banking houses to act as impartial advisers to buyers of securities; and, broadly speaking, it is unwise for the investor to rely primarily upon the advice of sellers of securities.” Zweig concludes that “Revising or expanding these conflict-of-interest policies won’t solve the problem. “The compelling force of self-interest” will continue to taint the judgment of those who give financial advice until firms finally, somehow, concede that the only way to cure conflicts of interest is to avoid them in the first place.”

In the Financial Post’s “Financial advisers face stricter disclosure rules” Barbara Shecter reports that Investment Industry (self-)Regulatory Organization of Canada (IIROC) released some reforms in their Client Relationship Model. However, the Canadian Foundation for the Advancement of Investor Rights (FAIR) indicates that “Rather than adopting a model that puts the best interests of the investor at the forefront, ahead of those of the advisor or firm…the overhaul instead represents “an endorsement of the existing Canadian regulatory framework for dealers and advisors” that leaves retail clients vulnerable in what is an “inherently unequal relationship.” (Buyer beware!)

Consider yourself warned about ETNs. In the WSJ’s “Chaos over a plunging note” Lauricella, Eaglesham and Dietrich report that SEC is investigating the $700M (TVIX-VelocityShares 2x Long VIX) ETN intended to track the stock market volatility which dropped 60% in the past week. “On the surface, exchange-traded notes, widely known as ETNs, appear similar to exchange-traded funds, which trade like stocks on an exchange. But the inner workings of ETNs are more complicated. An ETN doesn’t actually hold any underlying investment as an exchange-traded fund, or ETF, would. Instead, an ETN is contractual agreement by the issuer to pay shareholders returns equal to the investments it is designed to track.” To top it off this ETN is not only based on very volatile option prices but is designed to amplify them. (If you don’t understand it, don’t buy it. If you think you understand it, you better read it again.)  Also in the WSJ, Murray Coleman’s “Rise of ETNs comes with tempered enthusiasm” warns investors that “ETNs trade like ETFs but represent unsecured debt notes tied to benchmark returns rather than shares of securities. So far this year, ETNs serving as portfolio hedges have been gaining the most traction with investors. Those include index-trackers designed to play market volatility and implement various options strategies as well as leveraged stock and commodities funds. So-called counterparty risks remain a sticking point… If an issuer gets into trouble, as took place in 2008′s global credit crisis, an ETN’s closure can leave investors holding an “empty bag”… As ETNs are a form of structured notes, they aren’t regulated with the same fiduciary standards as ETFs… “Since these essentially are private contracts written by a big bank, you’ve got to read the fine print very carefully…It’s not uncommon to find some very unfriendly features stuck deep inside an addendum.”

Garry Marr in the Financial Post’s “What if your mortgage rate went up 2 points?”  reports that mortgage bankers suggest a simple test in anticipation of rising mortgage rates. “Bank of Montreal stress tested Canadian households to see how they would stack up in a rising rate environment and found more than half of Canadian households could handle that 200 basis point increase. While 20% said they couldn’t, another 23% of respondents said they were unsure if a rate hike would affect them.” (This is a stress test well worth doing by Canadians, who unlike Americans, have no way of locking in the current low mortgage rates for 30 years. Also by looking at the province (B.C.) where the highest percent (32%) answered that they couldn’t handle a 2% rise, might be an indicator of where the a significant rise in mortgage rates would have the greatest on prices.)

In the Financial Post’s “My last Wealthy Boomer blog- at least for now”  Jonathan Chevreau announced that he is leaving the Financial Post after 19 years. (Chevreau‘s personal finance columns and blogs were always informative and an interesting. I am sorry to see him leave his post as an FP writer, but I wish him much success in his career move to editor at  MoneySense Magazine.  Jon will also continue blogging at his website at


Real Estate

The just released January 2012 Canadian Teranet-National Bank Composite House Price indicates that “Canadian home prices in January were up 0.1% from the previous month…after two consecutive months of retreat. Prices were up from the month before in seven of the 11 metropolitan markets surveyed: 0.7% in Halifax, 0.6% in Toronto, 0.4% in Victoria, 0.3% in Montreal, Ottawa-Gatineau and Hamilton and 0.2% in Winnipeg. The rise in Victoria followed three months of decline. For Winnipeg, in contrast, it was the 11th monthly gain in a year. Prices were down 0.3% in Quebec City, Vancouver and Calgary and down 1.1% in Edmonton. For Vancouver it was the fourth consecutive decline. For Calgary it was the fourth in five months.”

The just released U.S. January 2012 “Case-Shiller Home Price Indices” “showed annual declines of 3.9% and 3.8% for the 10- and 20-City Composites, respectively. Both composites saw price declines of 0.8% in the month of January. Sixteen of 19 MSAs also saw home prices decrease over the month; only Miami, Phoenix and Washington DC home prices went up versus December 2011… As of January 2012, average home prices across the United States are back to the levels where they were nearly a decade ago – in early 2003. Measured from their June/July 2006 peaks through January 2012, the peak-to-current decline for both the 10-City Composite and 20-City Composite is 34.4%. January’s levels are new lows for both Composites in the current housing cycle.”  “Home prices fall, but at a slower pace” “The Case-Shiller index trails the housing market considerably. It reports sales contracts that were recorded for a three-month period that ended in January, which means it reflects sales activity from the autumn of 2011. More recent indexes have reported modest stabilization for home prices. Home prices were flat in January on an index maintained by the Federal Housing Finance Agency. Median asking prices, meanwhile, were up by 6.8% in February from one year ago, according to, which tracks listing services in 146 metro areas.”


The Economist has an interesting set of interactive charts of global housing prices from 1975 until now in “Location, location, location” covering house price indices nominal and real, prices against average income and against rents.




The federal budget confirmed that Old Age Security (OAS) start will be shifted from age 65 to 67 starting in 2023 and phased in over four years, see the Financial Post’s “Federal budget kills penny, cuts CBC spending”. According to Benefit Canada’s “OAS delay may be catalyst to change: indicates that “those currently approaching the current OAS eligibility age of 65 will have the option of deferring their payments for up to five years, starting on July 1, 2013. Effectively, this would increase the maximum annual OAS payments for those who choose to defer—someone who waited until age 70 to draw OAS, for example, would receive $8,814 annually instead of $6,481.” (You might want to see my earlier blog OAS vs. Pension Reform. By the way, no mention of any specifics of changes of MP pensions, while public service employees will be increasing their contributions to 50% of the cost (at least to the extent that they can figure out how to calculate the fuzzy liabilities of indexed DB pensions). The C.D. Howe Institute report by Peter hicks suggests that “Looking ahead, labour market pressures, changing work preferences among baby boomers, better health and a continuation of “push” factors such as inadequate private pensions and retirement savings will reinforce a continuation and acceleration of trends toward even later retirement. This trend provides win-win solutions on many fronts and should be encouraged by public policy”, according to the Globe and Mail’s “The later retirement solution” (True that people are living longer and need to finance a longer retirement unless they work longer, so they’ll have to work longer; but will they be able to work longer due to health or job availability is TBD.)

In the Globe and Mail’s “Ontario strikes a low to Ottawa’s pension reforms” McFarland, Perkins and Curry report that Ontario slams “the federal government’s effort to create pooled registered pension plans … The province outlined a number of serious concerns, including the notion that PRPPs might simply replace other forms of retirement savings instead of growing the overall pie…that compulsory contributions for employees of companies who sign on might not take into consideration life events such as divorce or financial hardship, and it said it is not yet clear that the plans will truly be low cost…(and the cost of necessary regulatory oversight)…Ontario believes the implementation of pension innovation should be tied to CPP enhancement as part of a comprehensive approach.” (It’s about time that one of the provinces finally calls it the way it sees it (and the way it is), the PRPP-Emperor has no clothes. Thanks to Dan Braniff founder of CFRS for recommending article.) Another change announced in the Ontario budget “included provisions that would see high-income seniors pay a new income-tested deductible on the provincial drug plan…Financial advisors with seniors in their client base, however, need not fret. Seniors advocacy groups and industry experts have unanimously said the change is not as dramatic as it seems…Under the new plan, single seniors with an income over $100,000 will pay a deductible of $100 plus 3% of their income. For couples with an income above $160,000, the deductible will be $200 per couple plus 3% of the family income…” compared to currently paying “the first $100 of annual drug costs”. “ (Thanks to Susan Eng of CARP for recommending.)


Things to Ponder

The Economist’s Buttonwood, in “Equities- A good buy?”, discusses Goldman analyst Oppenheimer’s bullish arguments of equities (at least as compared to bonds) which he juxtaposes against a recent report on the more “modest assessment” of future equity risk premium by Dimson, Marsh and Staunton based on “the dividend yield, real dividend growth and changes in the price-dividend ratio”.

And speaking of the outlook for bonds vs. stocks, in the Financial Times’ “Reserve managers have acquired an appetite for risk” John Plender reports that central bankers who have traditionally been most risk-averse have recently move to investing more aggressively. Official reserves which have grown from 6% in 1999 to 16% of GDP now are at $10.2T. Two-thirds of the reserves are held by emerging markets where they represent 25% of GDP. The pressure to increase the returns on this growing pile of assets has resulted in: bond holdings of longer duration and a move into equities (e.g. Switzerland and Israel). The private sector has moved into the opposite direction as exemplified by pension funds which reduced equity exposure in a move to bonds driven by an LDI approach, at a time when “government bonds are at their most expensive valuations since the 1930s”. He opines that much of the situation is the result of the distortion called “financial repression” orchestrated by governments on the backs of savers (retirees) to reduce the cost of government deficits.

And finally, in’s “Your financial advisor may be a lemon” Christopher Matthews refers to a recent NBER report which indicates that “financial advisers are often more likely to give advice that will lead to higher fees for them than higher returns for their customers. These economists sent hundreds of fake clients to financial advisery firms, banks, and brokerages around the Boston area and found that in many cases those advisers actually steered their clients away from more productive investments to less productive ones that produced more fees…(one of the report authors is quoted as)  “Right now, anyone can just call themselves a financial adviser without any education or fiduciary responsibility”…Until the industry reforms itself, however, the best defense for investors is the knowledge that not all investment advisers have your best interests at heart.”


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