Contents: CFA Institute’s Statement of Investor Rights, pay accountant for tax planning and do your own taxes, employees make different health insurance choices when spending own money, Canada housing deflating: sales off 16% YoY and house price index fell six consecutive months MoM, investors responsible for downtown Vancouver areas 25% vacant, Florida housing up? corporate bankruptcy is used to shirk retirement benefits, Swedroe advice unchanged though new book title may suggest otherwise, income and tax load distribution in US/Canada, protect yourself against custody risk, Japan: inflation or deflation, Europe’s flawed construct but US ‘snowbird’ effect might be the solution? life mission/purpose promotes healthier/longer life.

Personal Finance and Investments

In the Globe and Mail’s “Ten rights investors should expect from financial advisers” Rob Carrick reports that the CFA Institute has issued a Statement of Investor Rights which specify 10 investor rights, that investors should demand from their financial professionals, and financial professionals should explicitly commit to. “Among the rights you should demand: You have the right to honest, competent and ethical conduct; to independent, objective advice; and to an explanation of all fees charged to the client. The most important point is a basic one – that your financial interests take precedence over those of your adviser and his or her company.” (Certainly a great initiative intended to set high investor expectations as to their rights. The CFA Institute Code of Ethics and Standards of Professional Conduct (available in the Standards of Practice Handbook) already explicitly require that CFA Charter holders adhere to an even broader and more stringent set of requirements in client relationships and requirements are backed up by a Professional Conduct Program including sanctions when appropriate. Disclosure: I am a CFA Charter holder.)

In the Financial Post’s “Accountants: The unsung heroes of financial planning” Jason Heath reminds readers of the fast approaching tax season and suggests that “people take a life-long view of taxes. It’s not necessarily all about paying the least amount of tax today that matters.” Furthermore Heath argues that with the available tax preparation technology today “I’d rather see people pay an accountant for tax planning and do their own taxes.”

In the WSJ’s “To save, workers take on health cost risk” Anna Wilde Mathews reports on the some U.S. employers started offering employees “a sum of money and allowing them to choose their health plans at an online marketplace”. The outcome of using such “employer-centric” “private exchanges” has been employees “were willing to choose lower-priced plans that required them to pay more out of their pockets for health care”, demonstrating that people make different choices when they are spending their own money.

Real Estate

The February 2013 Canada’s Teranet-National Bank House Price Index indicates a -0.2% MoM decline and 2.7% YoY increase in Canadian home prices. Quebec City, Toronto and Calgary were among the cities doing better than the YoY average, while Ottawa and Montreal had below YoY average increases; Vancouver however declined -1.5% over the previous 12 months. On a MoM basis the index declined for the sixth straight month. Among decliners during February were: Calgary (-1.2%), Toronto (-0.3%), Montreal (-0.4%) and Ottawa (-0.8%).

In the National Post’s “Home sales have plunged almost 16% in a year as price gains slow”  Andrea Hopkins reports that according to the Canadian Real Estate Association Canadian home sales were down -2.1% MoM and a staggering -15.8% on a YoY basis. CREA opined that “the government’s move to tighten mortgage lending rules in July 2012 has slowed the market, and lower activity is expected until at least the June-to-August peak season.”

In the Globe and Mail’s “Vancouver’s vacancies point to investors, not residents” Frances Bula reports that according to a new report “Nearly a quarter of condos in Vancouver are empty or occupied by non-residents in some dense areas of downtown, a signal that investors play a significant role in the city’s housing market.” Vancouver in total had 7.7% of “dwellings that showed up as either “unoccupied” or occupied “by a foreign resident and/or by temporarily present persons” on Census Day 2011”; this compares unfavorable with 5.4% in Toronto and 5% in Calgary. The article discusses the implications of the absence of “active full-time population” on the community in general and more specifically actual supportable commercial activity in the area.

In Palm Beach Post’s “Palm Beach County home prices up 27 percent from year ago” Jeff Ostrowski reports that “The median price of an existing home sold in the county rose to $235,000, up 27 percent from a year ago and 8 percent from January, the Realtors Association of the Palm Beaches said today. Sales volumes continued to rise, too. There were 1,012 single-family home sales last month, up 9.6 percent from a year ago and up 5 percent from last month…. Prices were buoyed by shrinking inventories. It also helped that there were fewer low-priced foreclosures and short sales dragging down prices.” But John Tuccillo warns that “This is a price number that reflects what’s selling in the market, and it does not necessarily reflect appreciation…It shows directionality, but it’s not a measure of values.” The other effect built in is the drop of 40% in foreclosure sales from a year ago.

Pensions and Retirement Income

In the WSJ’s “Retired coal miners fight to retain benefits” Kris Maher discusses the impact of the bankruptcy of (an acquirer of) retirees’ employer which is “asking a bankruptcy-court judge to throw out the union contract that guarantees retirement (health) benefits”. The US company indicates that its plight is at least in part due to unsustainable rise in retiree benefit costs and much higher costs than its non-unionized competitors. (Retirement benefits promised/earned as part of employees’ overall compensation package often over a lifetime of employment are now increasingly under threat due to economic circumstances in general but further aggravated by demographics. By the way, I think I have seen this story somewhere before…oh yes, it happened to Nortel employees and retirees, except the impact wasn’t just on “retirement benefits” often funded from company operating funds, but also trust funded pensions earned over 30 or more years of employment- and Canada has no pension guarantees like the US and the UK, except for Ontario guarantee to protect the first $12,000 of pension a year. You say unconscionable? I agree.)

Things to Ponder

In this IndexUniverse interview with Larry Swedroe entitled “Swedroe: Using Buffett to model behavior”, Swedroe discusses his new book “Think, Act and Invest like Warren Buffett” which appears to be, but in fact is not, a contradiction of his long time advocacy for index investing. The interview (and presumably the book) focuses on the importance of: passive over the futility and loss of control with active investing, asset allocation, no market timing, low-cost investments and advice, real advice being about retirement planning and quarterbacking your entire “financial services team”, staying the course and “keeping your head when all about you are losing theirs”, and forgetting about all the forecasters. (It sounds like a great book, which I haven’t read yet, which condenses much of Sweadroe’s financial wisdom.)

You can find some interesting statistics in Jamie Golombek’s Financial Post article “Here is what the wealthiest of the wealthy in Canada earn- and pay in taxes” . Based on 2010 taxes filed by 25.5M Canadians: (1) the top 1% (255K) earned 10.6% of total income, paid 21% of total taxes and needed a minimum of $201K of income to qualify, (2) the top 0.1% (25.5K) breakpoint was an income of $685K and median age of 51K, while the top 0.01% (2550) breakpoint was $2.57M and median age of 55. Golombek also provides comparative US data: to break into top 1% requires $370K and they paid 37% of total US taxes, while top 10% breakpoint is $116K and they pay 71% of total taxes. In Canada the top 10% paid 55% of taxes. The bottom 50% in the US paid 2.4% of US taxes, while in Canada 4% of taxes.

In the WSJ’s “What can you do to steer clear of a ‘custody’ battle” Jason Zweig writes that generally speaking we assume that when a “custodian” holds your assets and the assets are “segregated”, and these assets are safe even if the custodian becomes insolvent. However, recently some doubt surfaced about this assumption. The SEC found that “one-third of firms with potential infractions appeared to have improper custody arrangements… and (according to a recent article in Legal Journal) federal rules on custody are wispy, state laws are contradictory and there is no absolute protection if a custodian goes bust.” Zweig suggests that “it is prudent to divide your assets among more than one mutual-fund company or brokerage. You want maximum independence between your investment adviser and the custodial firm he uses.”

Japan, well into the third decade of deflation and stagnation, is changing course.  The Financial Times’   “Japan sets course for hyperinflation” calls the new policies of yen depreciation, targeting 2% inflation and large fiscal deficits as “increasingly destabilizing” with the potential to “rekindle uncertainty and upheaval across the globe” and “may be setting the stage for a global inflationary spiral, perhaps beyond anything previously experienced”. The WSJ’s  “Stagnant Japan rolls dice on era of easy money” argues that a weaker yen is a given but this increases the risk that other nations will undertake competitive devaluation of their own currency; but others worry that QE won’t work in Japan due to rapidly aging and shrinking population. The article also expressed concerns about the risk of import price increase driven inflation ahead of desired increase in profits and wages, which would further slow the economy. Gary Shilling in Bloomberg’s “Why global economies face an age of deflation” argues that deflation rather than inflation will be course of the global economy because historically inflation occurred when simultaneously both government and private sector overspend, as when there are wars under way. “In the 95 wartime years since 1749, wholesale price increases averaged 5.7 percent. In the 168 peacetime years, they fell 1.2 percent annually on average.” The US now exiting wars, private sector is aggressively deleveraging, savings rate is increasing, the population is aging, there is excess supply, the risk of potential protectionism and competitive devaluations, decreasing power of labor; these all are powerful deflationary forces which will ultimately prevail. (The answer to the question of whether we are on the way to inflation or deflation in the coming years continues to be obscured by thick fog. You might also be wondering what Canada’s finance minister was thinking when he decided to make those arm-twisting telephone call to mortgage lenders urging them not to drop rates: fear of fueling Canada’s house bubble, or trying to preserve/increase profitability of banks to build up their reserves or concerns over inflation/deflation?)

In the Financial Post’s “Europe is a complete disaster, and its luck may have just run out” Joe Weisenthal writes that “The crisis in Cyprus is a good opportunity to take a step back and remind ourselves how incredibly broken the Eurozone remains. For one thing, the whole reason the Eurozone has these sovereign debt crises is because while the countries share a common currency, they don’t share a common Treasury. So it is literally possible for a country to just run out of cash. That can’t happen in a country like the U.S. or the U.K., which are capable of creating their own money.” So Cyprus needed a bailout which requires not just the approval of its legislature but also that of the German parliament; the attached conditions to the bailout had to be not just palatable to the former but ‘brutal enough’ to be passed by the latter. However Gillian Tett in the Financial Times’ “US ‘snowbird’ effect is what Europe needs” argues that “if hordes of German, Dutch or Finnish pensioners could be forced to spend money in Greece or Cyprus, that might rectify those pesky current account balances and boost activity down south.” You might also be interested in reading the Economist’s “Just when you thought it was safe…” analysis of the complexities and potential fallout of the Cyprus crisis.

And finally, those seeking some non-financial retirement advice might be interested in reading Diane Cole’s interview with Pat Boyle in the WSJ article   “Why you need to find a mission” which discusses “getting a purpose in life” because “having a purpose in life can help stave off cognitive decline and promote a broadly healthier, longer life.” Cognitive decline is 30% slower in people who are purposefully pursuing their goals, are connected to other people and are physically active. Finding a purpose doesn’t happen spontaneously but starts with asking yourself what’s energizes, motivates and makes life meaningful to you. (Preparation for this aspect of retirement, which some call Life 2.0, is as important as the financial one if one wants a smooth transition into retirement.)