Topics: Long-term care insurance, retirement location factors, mutual fund fees destroy retirements, lack trust, Canada in real estate bubble? realtor rip-off, not-for-profit pensions, CPP vs. PRPP, “financial repression”, insurance company demutualization? Fama: efficient markets and passive vs. active investing.

Personal Finance and Investments

In Kiplinger’s “Navigate a course for long-term care” Kimberly Langford looks at the turmoil in the LTCI business with insurance companies abandoning the market, while existing and new policies come with increased prices (yes, even existing policies too). Langford suggests that if you are hit with a price increase on your existing policy, don’t abandon it, since new policies are likely to be even more expensive; instead consider cost saving measures like reduced benefit period, increase waiting period, lower inflation protection if you had one. She also suggests that you consider policies which are paid for fixed number of years (e.g. 10 years), joint policies with spouse which provides a given combined benefit usable by both,  hybrid policies (life insurance coupled with LTCI), and (pure) longevity insurance. On the same topic in the Journal of Financial Planning’s “Seeking alternatives to long-term care insurance” Tom Nawrocki also suggest consideration of hybrid policies (this time LTCI with annuity is also mentioned), self-insuring with separate accounts/assets dedicated to LTC , reverse mortgages, family involvement/considerations and that LTCI is only/primarily applicable to those with assets between $500,000 and $3,000,000. (I looked at LTCI a couple of years ago and for various reasons, described in Long- term Care Insurance (LTCI- I) and Long-Term Care Insurance (LTCI) II- Musings on the Affordability, Need and Value: A (More) Quantitative View, I walked away less than enthusiastic about it. While LTCI sounds attractive (“buys peace of mind”) the most important areas of concern were: policies expensive and load factors of 50% (for each $1 only $0.50 benefits paid), insurance company has right to increase premiums so you have no idea what policy will ultimately cost, policies are very complex and non-standard, and you don’t know if and when you might qualify or what percent of your LTC expenses would be covered. If you decide to buy, I also mention a list of considerations towards your decision, in addition to getting expert advice.)

Ellen Schultz in the WSJ’s “Picking a place to retire” writes that while “most people tend to retire close to home” those who move, are either the frail moving closer to children or the “energetic affluent”. Two key considerations she suggests are cost of housing and taxes in general, i.e. what income is taxed in each state, property taxes, sales taxes, wealth taxes, etc.

It’s not news but, especially in Canada, it is well worth repeating. In the Journal of Financial Planning’s “The tyranny of compounding fees: Are mutual funds bleeding retirement accounts dry?”  Stewart Neufeld explains the impact of 50 bps, 100 bps and 250 bps MER drag on fund performance and investor’s share of available market returns. “The financial services industry share of market returns increases with the length of investment period. For annual performance lags of 250 basis points (bps), the industry share over 10 years is about 46 percent on average; over 50 years it increases to 74 percent. Smaller degrees of underperformance increase investor shares substantially: 50-bp lags result in an average investor share of 90 percent for 10-year investment periods and 77 percent after 50 years. He recommends that investors use index funds carrying  10 bps fees. (Thanks to Ken Kivenko of http://www.CanadianFundWatch.com for referring)

The Financial Advisor’s “Advisors should talk sooner with clients about retirement distributions” discusses the importance of having the transition to decumulation discussion with clients as much as 10 years before planned retirement date. One advisor quoted indicated that “the biggest problem is setting realistic expectations for clients, he said. “It almost offends me when I see some of the things put out about this dreaming thing. You ought to be dreaming about what you want to do in retirement. I have no problem with dreaming, but I really think you must have your expectations in focus first. And then with the 50 cents you’ve got left, then you can dream“. But, to me, the most interesting part of the article was that “studies have shown that the United States is in a 50-year cyclical decline in trust. In 1961, about 56% said “yes” when asked if they trust people, but that percentage has declined to 22% today”. (Ouch!!!)

Real Estate

The debate heats up on whether Canada’s condo market, or at least Toronto’s and Vancouver’s, is in a bubble. Articles addressing the bubble’ vs. ‘no-bubble’ sides are now appearing daily in the papers. Arguments for the bubble case include: rapid increase in supply, rapid increase in prices and assorted affordability ratios, high percentage of ‘investor/speculator’ participation, immigration and foreign buyer participation. On the ‘no-bubble’ side the arguments include: new demographics, low interest rates, and people moving to major centers. You be the judge; read some of the views in “’Canadian condo craze’ gets crazier”, “RBC chief Nixon weighs in on housing bubble furor” “Toronto condo market ripe for a correction?” and “Demographics make big city condos hot”

The Economist’s “The great realtor rip-off” writes that “In Britain, if you want to sell your home, an estate agent will list the property, find a buyer, help you negotiate a deal and guide you through the transaction, all for a commission of 2-3% of the sale price. In America, realtors provide the same services for roughly double the fee.” The article tries to answer the question “why are (U.S.) fees so persistent” even though the internet was successful in eliminating inefficient middlemen in other industries. The answers suggested include: housing crash made selling more difficult so more ‘expert’ help is needed, “clients are suckers”, there is less competition than it appears with a few large brokers dominant, “industry captured its regulators”, “interdependent nature of the business” forces brokers to collaborate.

Pensions

In Toronto Life’s “Why the obvious fix for the country’s collective pension problem is being ignored” Tony Keller discusses why the PRPP is being pushed by the government instead of the more obvious CPP expansion. Keller enumerates some of the problems with the proposed PRPP, but he argues that “the biggest problem with the PRPP is its dishonesty. It is not a pension plan.” The PRPP is a DC plan; DB is a pension plan. He concludes with “More retirement savings through CPP looks, to those who aren’t looking carefully, like more government. Bad, bad, bad. And what about Joe Lunchpail, scratching together a few cents to take a flyer on one of Bay Street’s speculative, high-fee mutual funds? Why, that looks like freedom.” (Recommended by CARP Action onLine.)

On a related topic, Pauline Skypala writes in the Financial Times’ “Pension optimist misses a rich point” that “There is a case for making pension provision a not-for-profit activity. That is the simplest way to restore trust in pensions, and ensure better outcomes for savers. Savers must also be assured their money will not be treated by politicians as a useful source of capital when government coffers are stretched.”

Things to Ponder

In the Financial Times’ “Repression on bonds heralds masochism” Gillian Tett defines “financial repression” as “when governments engineer a situation in which investors feel compelled to buy bonds at unfavourable rates, i.e. below the prevailing level of inflation, thus helping to reduce national debt”.  Yet investors in general and pension funds in particular are voluntarily piling into bonds “more focused on capital preservation and liquidity, than returns”, and potentially exposing themselves to massive risk should inflation and/or growth spurt. Tett suggests that this “mass market financial masochism” might continue for a while.

To see how broken Canada’s insurance industry really is, read a couple of articles in the Financial Post by John Greenwood entitled “New rules for demutualization on the way” and “Lifecos and dead stocks: Strange bedfellows stuck with each other”. The first one discusses an aberration where some mutual property and casualty insurance companies, planning to demutualize, have a large surplus accumulated often over decades yet have a very small number of participating policy holders who upon demutualization would end up being entitled to a large amount of cash, and this is holding up changes in demutualization rules by Canada’s finance department. The second article, discusses life insurance companies which after demutualization ended up chasing new guaranteed investment products (variable annuities with GMWBs) which provided a gusher of, if not illusory, certainly temporary profits followed by losses due to lack of understanding of what they were insuring, while chasing shareholder rather than policyholder value. (Would it make more sense for the Minister of Finance to focus on remutualization rather than demutualization and moving back insurance to its roots? The roots are about pooling of individual risk rather than societal/catastrophic risk (e.g. market risk) and mutual rather than stock corporate organization with fiduciary duty owed exclusively to the policyholder. )

And finally watch a six minute Financial Times video of Gene Fama being interviewed by James Mackintosh “Investors should stop trying to beat markets and use passive trackers”. This is well worth your time, especially if you are still pursuing active investing. Fama talks about: efficient markets, passive vs. active investing, “bubbles” and “luck vs. skill” in active management.