Hot Off the Web- February 4, 2013

Contents: Judicious disputing of credit card charge a powerful tool, bond risks, RRSPs about tax brackets, mutual fund considerations- but why bother? dual registrants: fiduciary or not? US home prices up YoY but down MoM due to seasonal effect, Canada’s bankruptcy laws flawed but lawyers happy, shared risk pension plans, expanded CPP: better to proceed smarter rather than slower, ETF history, Canada’s income inequality much lower than US, age 65+ labor participation rate climbing, Alan Blinder in “After the music stopped”: tighter regulation could have prevented financial crisis, killed by daily shower?

Personal Finance and Investments

In the NYT’s “Disputing a charge on your credit card” Ron Lieber discusses the power of disputing a charge, which he calls it a real “weapon”.  The card issuer “takes your word against the merchant or service provider at the outset, restores the money to your bank account temporarily or issues a credit and then goes about its investigation. It essentially demands that the merchant or service provider who supposedly did you wrong prove that it did no wrong at all.” (I have only done it twice in my life: once for a restaurant which systematically/intentionally/repeatedly added several dollars to the bills of everyone in our party (the bank just credited our account for the overcharge but refused to investigate the restaurant- which by the way,  is no longer in business; perhaps others noticed it as well and stopped coming back) and another time in the case of a major (>$10,000) renovation bill where even after repeated verbal/written requests the supplier did not provide the contractually promised written guarantee; the guarantee arrived days after the final payment was disputed. So Lieber is right, it is a powerful weapon so long as it is used judiciously and sparingly.)

In the WSJ’s “The risk of safety” Joe Light discusses the dangers that come with playing it safe with bonds. The current low rates associated with the financial repression are hurting retirees who typically use bonds as portfolio stabilizers. Not only are they locking in long-term low nominal rates and perhaps even negative real rates, but if interest rates rise they lose capital in bond funds (“duration” of the fund determines sensitivity to interest rate changes; duration of 5 means 5% reduction of fund value for each 1% increase in interest rates), capitalization weighted bond index funds also have highest exposure to most indebted companies/countries, TIPS “adjust their principal, rather than interest rate, based on CPI” so they are also vulnerable to interest rates increases. Interest rate risk may be reduced by laddering fixed income securities-GIC/CDs, short-term bond funds, bullet corporate bond funds, and emerging market government bonds. (More recently my personal fixed income portfolio stabilizers were increasingly 1-2 year CDIC insured GICs, though this is starting to be more painful as more of my maturing 5 year 5% GICs need to be replaced.)

In the Financial Post’s “RRSPs all about tax brackets” Jamie Golombek explains that “While many people cite the tax deduction as the main advantage of contributing to an RRSP, it’s only worth something if you find yourself in a lower tax bracket at the time of withdrawal than you were in the year you made the contribution. Otherwise, the tax deduction itself is worthless and the only tax advantage is the ability to earn effectively tax-free investment income.”

In the Financial Post’s “5 things you should know before buying a mutual fund” twenty year (ex-)mutual fund manager Peter Hodson writes that “The mutual fund business is a great industry — for the people that sell them. For investors, it’s not so good.” He warns potential investors about five things they must know before buying a mutual fund: (high) fees which prevent managers from sustainably beating (or even matching) the market, short-term focus, bonus motivated behavior driving managers to “go-for-broke” gambling with investors’ money when they are having a bad year, mutual fund business thrives on asset gathering so managers will continue to encourage additional inflows even when they expect down markets (or even if their winning strategy doesn’t scale), and “excessive deal buying and stock trading. (If mutual funds are bad for investors, an even better strategy is to stop them given the ready availability of ETFs covering all asset classes; this is especially true in Canada which has the world’s highest MERs. At times even with unrealized gains in a fund it might make sense to sell already owned funds, but certainly I’d have a hard time suggesting mutual funds to anyone. I haven’t bought any for many years and haven’t owned any for a couple of years.)

In Financial Planning’s “Hybrid advisors outpace RIAs” Donald Korn discusses the growing number of ‘advisers’ and aggregators moving to a dual registration (I suspect not ‘hybrid’ as the title suggests) model whereby advisor assumes the RIA hat (which requires fiduciary level of care) while continuing to maintain a relationship with an independent broker-dealer; this way advisor has “access to both commission- and fee-based business”.  This may be a just a transition path to the growing trend to fee-based model or (some cynics/critics might say) that it is just another way to generate additional commission/trailer income from mutual funds or insurance products such as variable annuities. (The article does not make a judgement whether this might be good or bad for the client: good if it offers an easier short-term transition path for “advisor” from their non-fiduciary/commission-based to a fiduciary/fee-only model, but bad if it is just a way to circumvent the fiduciary responsibility by tactics such as a bait-and-switch, i.e. bringing client in with fiduciary promise and then shifting her to “cheaper” commissioned model.)

Real Estate

The November 2013  Case Shiller Home Price Indices show a YoY increase of 4.5% and 5.5% respectively for the 10- and 20-City composites, however November showed in month decline of -0.2% and -0.1% respectively  in part due to winter months being slow months for house sales; seasonally adjusted prices in the month were up 0.5% for each composite. Phoenix had the highest YoY increase in prices at 22.8%, as well as the highest in month increase of 1.4% (the in month increase was matched by San Francisco). “Vegas, Los Angeles, Miami, Minneapolis, Phoenix, San Diego, San Francisco and Seattle were the ten MSAs to post positive month-over-month returns. In the context of monthly changes, Boston, Chicago and New York have fared the worst – with more than six months of declining prices in the past 12 months.”

In Palm Beach Post’s “South Florida in top 20 for foreclosure deals” Kim Miller reports that “Palm Beach County had a 5.9 months’ supply of single-family homes in December, according to the Realtors Association of the Palm Beaches. There was a six-month supply of condominiums and townhomes. Traditionally, a 5.5 months’ supply is considered a balanced market. According to the report, Palm Beach, Broward and Miami-Dade counties have a 29 months’ supply of homes in some stage of foreclosure but not yet listed for sale on the market. That equals 104,833 homes. The average foreclosure sales price in South Florida last year was $129,941, a 30 percent discount from what homebuyers paid for a non-foreclosure, according to RealtyTrac.”

Pensions and Retirement Income

The fallout of the failed Nortel mediation last week is finally sinking in with those affected most. The Ottawa Business Journal’s Union says Nortel pensioners treated unjustly under bankruptcy law” quotes the CAW (the union representing the non-managerial/non-negotiated pension plan members) as blaming greedy bondholders “who bought their bonds for 20 cents on the dollar wanted not only the full value of the bonds, amounting to some $4.5 billion, but years of interest on top of that”; the CAW also calls Canada’s bankruptcy laws flawed  for allowing “the unjust treatment of former Nortel workers, disabled employees and pensioners”. (I can’t disagree with that.)The OBJ in “Former Nortel workers ask bankruptcy czars to investigate fees paid by estate” also reports that “Representatives for disabled ex-Nortel Networks employees have filed a complaint with Canadian and American bankruptcy watchdogs over professional fees paid by the former technology giant’s estate…(given that) ” One media outlet has reported that the firm has been billed for $755 million worldwide since the negotiations begun.”  (Hard to disagree with this either. Thanks to JC for referring articles.)

In Benefit Canada’s “All eyes on shared risk plans” Susan Deller  discusses shared risk plans (SRPs) introduced by New Brunswick which combine “the DC approach to plan funding and the DB approach to providing retirement income…SRPs pay a base benefit funded from contributions and a conservative investment policy…(and potential) enhancements…may be granted for past periods when and if funding allows. But, there are no benefit guarantees. Benefit amounts are targets, not promises.” “For members, this translates into a pension that provides a more predictable benefit amount than the standard DC plan, without the same risks (the risks of members making poor investment decisions or outliving their savings). For plan sponsors, the new model effectively eliminates the open ended financial risk associated with DB plans.” (Let’s be realistic, DB plans are history in the private sector since the private sector is not willing to continue to carry the perceived risk of DB plans; also better models are required than those that deliver DC plan members to investment vehicles with high fees and without professional guidance to achieve retirement target. Yes, pension reforms are urgently needed, but the reforms must also include changes in BIA/CCAA laws which raise the priority of pensions in bankruptcy because they are deferred wages and “deemed trusts”.)

In the Financial Post’s “Five reasons Canada should go slow on CPP expansion” Fred Vettese opines that “the case for a bigger C/QPP is questionable at best, and if it is implemented poorly it can be a disaster”. I struggle with at least the first two of his five reasons. First Vettese calls the expanded CP “a solution in search of a problem” because “poverty rates among seniors is very low” (I wasn’t aware that the CPP was a poverty reduction program; if it was than it would not be based on employment-only income/contribution but would also cover homemakers and caregivers.) He also mentions that “Nearly half of recent retirees have enough retirement income to replace more than 115% of their regular pre-retirement consumption” but fails to mention the source of this data, and even if this was true why this would continue as such when increasingly younger boomers more than likely have decreasing levels of retirement income sourced from DB plans; and how is the other half doing? His second worry is about healthcare squeezing out other government programs like pensions, but I thought that CPP was ‘fully funded’ at least on a pay-as-you-go basis and is not a tax funded government “program”. While I resonate with some of his other concerns (high cost of CPP, later eligibility due to increased longevity and increased concentration/reliance in/on a government run pension plan), these other points have more to do with people’s perceptions/assumptions about what an expanded CPP might look like and how well or poorly it might be implemented. But of course, the expanded portion of the CPP does not have to be identical in every way to the existing CPP; it just needs to be built on the CPP administrative infrastructure which is already paid for by the current CPP. For example see my Expanded-CPP Plus blog. Therefore it’s better to go smarter than slower!

Things to Ponder

The Economist’s “From vanilla to rocky road: The Darwinian evolution of exchange-traded funds” does a great summary of the history of ETFs the good ones, the plain vanilla broad index implemented by physicals, as well as the potentially toxic synthetics, leveraged, inverse ones. (You might find it both interesting and educational.)

In the Financial Post’s “Canada’s top earners still a modest lot compared to US” Melissa Leong reports that “The incomes of the top 1% of Canadian taxpayers equaled 10.6% of the national total in 2010, after growing from 7% in the early 1980s to a peak of 12.1% in 2006, Statistics Canada said Monday. The richest 1% of Americans took home 24% of the national income in 2010.” Admission to the top 1% in Canada was $201K compared to $352K in the US.

In the NYT’s “Older but not yet retired” Catherine Rampell reports some interesting data on the increasing labor participation rates of the age 65+ population. (I found particularly surprising) the difference in participation rates between US (18%) and Canada (11%). (Thanks to KW for referring.)

In the USAToday’s “Reflection on the financial crisis” Steve Weinberg reviews Alan Blinder’s new book entitled After the Music Stopped  which he calls necessary as his “version of the story…focuses more on the why than on the what of the crisis and response. No one else has done that to date… (it) is to give the big picture rather than focus on just one or two pieces.” Weinstein reports that “government failed during the opening decade of the 21st century. The failure occurred mostly because of lax regulation. The financial police that should have been paying attention to reckless behavior within banks, brokerages, insurers and other for-profit powerhouses had been disarmed, on the theory that a healthy capitalist nation regulates itself. A nice thought, but greed had prevailed.” Some of his recommendations are that: “self-regulation by banks is unworkable due to a combination of greed as human nature and the myth that market discipline is a real phenomenon”, risk managers must be given more authority, approach derivatives with great caution. “Dysfunctional compensation systems create incentives for dysfunction.”

And finally, in the NYT’s “That daily shower can be a killer” Jared Diamond discusses “the importance of being attentive to hazards that carry a low risk each time but are encountered frequently”. He gives the example of his daily shower which he approaches with caution, since “falls are a common cause of death in older people” (Diamond is 75). Even if the chances of falling are 1:1000, given that his life expectancy at 75 might be 15 more years or 5,475 more showers, he might fall about 5 times with those odds. He calls a “hypervigilant attitude toward repeated low risk as “constructive paranoia”, a seeming paranoia that actually makes good sense”. He writes that Americans “…obsess about the wrong things, and we fail to watch for real dangers…exaggerate the risks of events that are beyond our control (e.g. terrorists, plane crashes…)…and we underestimate the risk of events that we can control (e.g. driver actions: our own errors and/or “incautious other drivers”)”. (Thanks to SR for referring.)



  1. Peter.. a nit-picky point.. about RRSPs all about tax bracket..
    “Otherwise, the tax deduction itself is worthless and the only tax advantage is the ability to earn effectively tax-free investment income”

    is not quite accurate.. the investment income is also not tax free (you pay tax on it.. when you cash out)

    1. Hi Ashgar…You are right….and are not nit-picky…the quote I used from the article did not do justice to Golombek’s complete explanation…a better quote would have been this one “…effectively “tax-free” investment income on your after-tax contribution” …thanks for clarifying this point….the article exlains what he means with an example.

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