Contents: Ditching your ‘advisor’, TFSA Americans’ tax risk, insanity of US hospital bills, trailer commissions, Canada: house sales down will lead to flat/lower prices but multi-unit construction up perhaps due to effort to deflate China market? Florida “ground zero” for foreclosure crisis, Florida backs down on international driver permits but must also repeal the discriminatory property tax to make out-of-staters welcome again and heal property market, Nortel bankruptcy judges push try to accelerate creditors’ fight over cash but lawyers likely only beneficiaries with Canadian pensioners to get scraps, OECD urges sensible pension reform, expanded CP good for Canadian business, US and Canada 19^th and 13^th on retirement security index, Roubini: expect bigger bubble from financial repression, 6M Canadians to have >20% drop in standard of living in retirement, spending on food as a percent of total expenditures.

Personal Finance and Investments

In the Globe and Mail’s “Do-it-yourself investing: Ditching your advisor may be easier than you think” Rob Carrick lists the simple steps necessary to leave your ‘advisor’/broker (without even having to speak with him): 1. “Open an online brokerage account”, 2. “Fill out account transfer form”, 3. “Deal with transfer fees”, 4. “Wait for account transfer to be completed, 5.”Liquidate the fund portfolio”, and 6. “Build your new portfolio”. The article also includes some important Tips. (All sounds simple and could save you thousands of dollars a year once you conver from your mutual fund to an ETF ortfolio at an online broker.)

In the Financial Post’s “TFSAs a new tax risk for Americans living in Canada?” Barbara Shecter warns that “It’s actually likely that the U.S. will take the view that the income earned in the TFSA will be taxable on a current basis, unlike in Canada where there will be no tax, which may make this arrangement unattractive to U.S. citizens in Canada…(as) the investment vehicle was not designed to shelter income from U.S. tax.” This applies to RESPs as well.

In Bloomberg’s “Uninsured Americans get hit with highest hospital bills” Charles Babcock reports that American hospitals’ “full charges” which hit the 40 million without insurance have been increasing at 10% a year for the first decade of the 21^st century. “While the charges appear on hospital invoices across the U.S., the amounts people actually pay vary widely, depending on their health coverage. The system is so irrational that those without any insurance can get stuck owing the most money…” Hospitals claim that “Full charges keep rising because hospitals have to try to make up for charity care, debts they can’t collect and inadequate reimbursements from the government Medicare and Medicaid programs…” (Does this make sense to anyone? This is another reason why visitors to the U.S. must have travel emergency healthcare coverage before they leave for the US.)

In CanadianMoneySavers’ “Trailer commissions- Do they skew recommendations?” Ken Kivenko writes that investors understand neither the existence nor the “inherent conflicts-of-interest they cause” nor the corrosive effect of trailers on their ability to accumulate assets. He also recommends that you request an “enumeration of fees so you can determine whether or not you are getting value for money”. (While Ken is absolutely correct, my recommendation would be rather than focusing on what’s wrong with Canada’s mutual funds, instead Canadians should just stop buying mutual funds now that all asset classes necessary to build a diversified portfolio are available with low cost ETFs that will save them thousands of dollars per year. You remember the definition of insanity is “doing the same thing over and over again and expecting different outcome”.)

Real Estate

Shecter and Leong in the Financial Post’s ”Canadian housing prices set to flatline economists say” write that various reports suggest that “The annual rate of return for real estate will be about 2% over the next decade, meaning that prices will simply match the pace of inflation…. a severe economic shock, such as the kind that hit Japan in the early 1990s and California and Nevada in 2006, could knock Canadian housing prices down by 44%…Canadian residential home prices grew by an average of 5.4% per year between 1980 and 2012, climbing about 7% per year in the last decade.” Similarly in the Macleans’ “Brace yourself for some grim housing market news on Friday” Erica Alini writes that “February home sales numbers, due out on Friday, will almost certainly show that housing (sales volume) has resumed its southbound trajectory — and at a faster pace this time.” Local Vancouver and Toronto numbers already available indicate 29% and 15% drops respectively. While “…home prices have been holding up quite well… Prices movements, though, tend to lag supply and demand shifts, so we could still see a more pronounced correction later on. One worrying sign in this regard is that the ratio of homes sold to homes newly up for sale in January was woefully low — possibly indicating a supply glut.”

But the Canadian Press in “Canadian home building rebounds on condos” reports that house starts rose from 158K in January to 181K in February largely on the back of “an 18.4% rise in urban starts, led by a 27.7% increase in multiple-unit dwellings such as condos and apartments.” and in the Financial Post’s “China’s housing crackdown may drive cash to Canada’s condo market” Garry Marr writes that the “…crackdown on real estate ownership in the world’s most populous country might translate into Chinese citizens looking to move more of their money abroad, with Canada a leading destination.”

In the Palm Beach Post’s “Florida foreclosure rate more than three times national average” Kimberly Miller calls Florida the “ground zero for the nation’s foreclosure crisis” with a foreclosure rate of “three times the national average”. “Florida has 366,250 pending foreclosure cases in the courts and expects 680,000 more to be filed in the next three years… Florida metro areas accounted for seven of the top 10 regions nationally for high foreclosure rates… Still, the total number of Florida homes with foreclosure filings last month — 31,726 — is below what was seen right after the real estate crash. In February 2009, 46,391 homes received a foreclosure filing. That grew to 54,032 in February 2010.”

A few weeks ago (February 18 Hot Off the Web) I mentioned that the National Post reports (and many other Canadian papers, but no mention in Florida papers) that Florida passed a law requiring Canadians (and other foreigners) that to legally drive in Florida they will need an International Driving Permit. In the Palm Beach Post’s “Florida House moving quickly to repeal international driver permit law” Kennedy and Miller report that “The Florida House sought to ease tension with Canadian tourists Tuesday by moving swiftly to repeal a law requiring them to have international driver’s permits when motoring on state roadways… “We can let everybody know our state is open for business and we can roll out the red carpet,” said Rep. Daniel Davis, R-Jacksonville, who is sponsoring the repeal effort (HB 7059) which drew preliminary approval Tuesday in the House.” (If only Florida’s legislators could now fix the state’s discriminatory property tax treatment of Canadians (and other out-of-staters) primarily as a result of non-homesteaders’ dramatically higher property taxes due to Save-Our-Homes amendment, it might go a long way to ameliorating Florida’s disastrous real estate market! As many non-homesteaded property tax advocates said that we need: “Same tax, for same value”; for some background information see “An Update on Snowbirds’ Florida Tax Crisis”  (starting on page 14 of the Spring 2008 CSA Magazine issue). Things have improved since 2008 as a result of the collapse of Florida’s property market; I am now paying “only” twice the property tax what my homesteaded neighbors are paying for the identical unit, rather than three times as much. By the way for lower priced units, non-homesteaders might be paying ten or more time as such as their neighbors. Legislators need to do what’s right for Florida real estate market and for a fair treatment of all Florida property owners.)

Pensions and Retirement Income

In Reuters’s “Courts take novel approach to Nortel Networks cash fight”  Tom Hals reports that “A U.S. judge and a Canadian judge agreed on Friday to a joint, simultaneous trial to decide how to divide $9 billion from the liquidation of Nortel Networks, overruling objections that the unusual arrangement would lead to “chaos.””

But Bert Hill in Ottawa Citizen’s “Nortel fast-tracking unlikely to bring speedy resolution” writes that the news about the “fast track to trial” could result in “more pain for thousands of Nortel pensioners and disabled and former employees who took big financial losses, and more legal fights in the future”. Hill reports “$36 billion in claims chasing 9.7 billion in Nortel assets”. With assets likely to be “divided among U.S., Canadian and European operating divisions based on binding local restrictions and cash reserves- not equally among contending creditors around the world” financial analyst Diane Urquhart is quoted as expecting $1 for U.S. and $0.20 for Canadian creditors per $1 of claim. ($0.20 per dollar of Canadian claim has been the upper end of my guesstimated Canadian payout for a while; the Canadian government is standing by idly watching the fiasco unfold while refusing to protect Canadian pensioners by amending the BIA/CCAA to provide priority to trust funded pensions in bankruptcy.  The whole story is actually quite sickening: creditors around the world fighting to get an unfair share of Nortel’s juicy scraps, Nortel adding more law firms in ‘secret’ with court approval to further drain the remaining assets ($861M spent so far on legal/professional fees), etc. Canadian pensioners should be arranging their financial lives on the assumption that they’ll be getting a disastrous $0.10-$0.20 per $1 of claim, anything more than that looks like a triumph of hope over reality without Canadian government stepping in to protect Canadian pensioners.) Furthermore, in the Financial Post’s “Employees on long-term disability the big losers in Nortel bankruptcy” Barry Critchley writes that Nortel’s 350 long-term disabled and  their families received a settlement of only 35% of the estimated amount due to them. They (unlike pensioners, at least) “have launched a class action lawsuit against the trustees Northern Trust and Royal Trust, which has not yet been certified.”

Chris Flood reports in the Financial Times’ “Pension reforms urged by OECD” that OECD urges governments to act to rectify the low public confidence in DC plans by mechanisms to: increase savings rates (make contributions mandatory or at least require auto-enrolment), offer capital and  minimum return guarantees, equalize tax incentives for all income groups, introduce a combination of “deferred lifetime annuities starting at age 85 with income withdrawal options so that pensioners can pay for healthcare or make bequests”, and that competition among annuity providers should be encouraged including non-profit and public schemes”. (Not new, but great to see that the OECD is also advocating these changes, perhaps the Canadian government will respond and finally initiate real pension reform, which has so far been elusive. For example see the Globe and Mail article reprinted in CARPAction Online at “Pensions hit the perfect storm”.)

Canadian Business’s “A retirement solution big business will love” was also reprinted in CARPAction. The article opines that the recent CIBC CEO’s endorsement of an expanded CPP while might appear shocking at first sight given the likely impact on Canada’s banks and other financial institutions, actually makes good sense for Canadian businesses if it gave them a mechanism to offload (analogously to Canada’s public healthcare system) their crushing pension load. The article calls this a win-win for businesses and employees. For example, this would end the periodic begging by Canadian CEOs at the government’s doorstep for relief from pension obligations as in “Ottawa give Air Canada pension break, demands near freeze on executive compensation”.

In Benefit Canada’s “Is investment choice necessary?” Greg Hurst argues for DC plan designs without a choice of investment vehicles; just offer a balanced investment plan. (Not a bad idea for consideration!)

Things to Ponder

In a just released Natixis Global Asset Management index “US lags Europe, less affluent nations in retirement security” . The index “…gauges how well retired citizens live in 150 nations, based on measures of health, material well-being, finances and other factors…The United States ranks 19th worldwide in the retirement security of its citizens…Citizens of other industrialized nations can rely on strong social safety nets in old age, at least for now. In the U.S., we encourage workers to plan, save and invest, and promote policies that help them meet their future needs.” By the way, Canada ranked only 13^th, just ahead of Belgium, Japan, Slovenia, Czech Republic and Slovakia. Ahead of Canada you’ll find: Norway, Switzerland, Luxembourg, Sweden Austria, Finland, Netherlands, Denmark, Germany France, Australia and Israel.

In a Bloomberg video “Dr. Doom: Roubini sees bigger bubble now than in 2004” Nouriel Roubini opines that in 2004 the Fed took a slow two years to normalize interest rates (after artificially driving down rates following the dotcom crash) which then created a bubble; now the Fed will exit even more slowly due to concern about causing damage to the economy, so he warns that the bubble will be even bigger than last time.

In a CIBC research report entitled “Canadians’ retirement future: Mind the gap” Tal and Shenfeld indicate that Canada’s retirement income system is unraveling with future retirees will be less likely to maintain the standard of living they had while working. In fact they say that “A growing gap will leave close to six million Canadians facing a more than 20% drop in living standards as they leave the workforce… If left unchecked, current trends in pensions, government programs and savings rates will, particularly for today’s younger cohorts, be insufficient to allow today’s working Canadians to realize the retirement lifestyle that their elders have achieved.” The paper includes an Average Consumption Replacement Rate chart vs. Birth Cohort (years) which shows a steady drop of Consumption Replacement Rate from 100% for the 1940-44 group to <80% for those born post-1965; and of course averages don’t tell whole story. “Nearly 60% of Canadians born between 1985-89 and almost half of those born in the late 1960s will end up with a below 80% replacement rate.” (Thanks to Ken Kivenko for referring the report.)

And finally, the Economist’s “Thought for food” brings an interesting graph showing spending on food (and alcohol/tobacco) as a percent of total income. “…as countries develop people spend proportionately less on food. South Koreans spent one-third of their income on food in 1975; now the figure is just 12%.” Hungarians “devote 10% of their household spending to alcohol and tobacco”.