Hot Off the Web- May 20, 2013

Contents: Sell advice OR product, investor help, don’t overprotect from market? inertia and mutual fund fees, fragmented investment management, US healthcare costs in retirement, Canada’s decelerating housing up 2%, Shiller: houses are dreams- reality is TBD, longer US stays for Canadians? no retirement savings crisis in Canada??? annuities always the best??? annuities/insurance- the full picture, Nortel bondholders claim post-bankruptcy interest, QE overrated, best predictor of higher returns- low fees, Bitcoin threat? Stockman: Fed’s lost credibility.

Personal Finance and Investments

In the Financial Post’s “Sell advice or products, not both” Jason Heath writes what should be obvious by now but seems to have evaded so many: “Conflicts of interest in the financial industry will only disappear when the sale of advice is separated from the sale of products and when everyone understands exactly what fees they pay.” He quotes FPSC’s submission t CSA in which they argue that “there is a “fundamental flaw” in the Canadian financial services industry that sees the “service of professional advice being overlaid on a product sales infrastructure.” And the lack of transparency of fees just aggravates the whole situation. (Must read article if you are interested in the “fiduciary” debate.)

In the WSJ’s “Lifelines for investors in their own”  Carolyn Geer looks at various approaches for investors who want to do it themselves but would like some assistance. The answer today is either a discount broker or no-load fund company which offers “all-in-one” funds which could be either a fixed allocation or a target date fund (Vanguard and Fidelity are mentioned), or managed accounts where a professional manager assembles the portfolio, or buy an off-the-shelf financial plan with recommended investments ($25K minimum and fees ranging between 0.2-0.9% depending on account size/services), or a ‘personal financial planner who’ll provide continuing investment recommendations”, or software based services such as or which charge between 0.25-0.35% excluding cost of underlying ETFs of about 0.14%.

In the Financial Post’s “Why we overprotect ourselves from the stock market” Ted Rechtshaffen discusses why he believes that “a five-year GIC is an investing mistake” because investing in stocks over 5 year or longer horizon has been historically less risky than people believe. “…five-year periods since January 1950 the TSX would have outperformed a 2.2% return roughly 90% of the time…. Over 20-year periods since 1950, the worst performance on the S&P 500 (US Market) was 7.0%, while the best was 19.4%. For the TSX, the worst was 6.2% and the best was 14.1%.” (Yes building a portfolio entirely on GICs makes little sense for most, but doing it all with stocks would make just as little sense (see  Time Diversification: Stocks are less risky over the long-term??? (Not!)) especially for those near or in retirement. A balanced portfolio which factors in investor’s risk tolerance into the asset allocation would be more appropriate.)

In the Financial Post’s “Being conservative doesn’t mean embracing inertia”  Yves Rebetez writes “No one seems to care much about paying 1% more here, or 2% more there, but when it comes to your retirement savings, and you have a significant time horizon ahead to grow your nest egg, staying with a comfortable high-cost mutual fund means sharing quite a bit of that egg. ..(with the result being that)  “We turn our investment experience and your money into… our money and your investment experience. ”Mutual fund fees aren’t going away unless investors rise up and make them. … The longer you opt to leave that decision for another day, the smaller your nest egg will ultimately be. “ (Why do people continue to own mutual funds which cost them 1.5-2.5% more per year than an index based ETF covering the same asset class? Beside inertia, the only logical answer I can think of is that you might have a large unrealized capital gain that you might not want to realize now and pay taxes on at this point of time. However, using a back of the envelope calculation, even a 50% gain over cost would means only that 33% of the fund value is the gain which means that at 50% marginal tax rate you lose to tax 16.5% or at 33% rate you lose 11% to tax, which are recovered over 8 and 5 years respectively by lower fees, and from then on you are ahead 2% each year. So don’t necessarily let taxes on unrealized capital gains prevent you from getting out from under the yoke of mutual fund fees. By the way, there are lots of people who have been working hard to shame the industry into reducing mutual fund fees and increasing disclosure associated with them, but you the investor can solve your mutual fund fee problem by simply not buying them, unless you understand that you are getting value for money.)

In the Financial Post’s “Fragmented investment management can add to the tax bite” Joanne Swystun cautions that when using multiple brokers and ‘advisors’ you could end up with tax inefficiencies which could cost you dearly, like: (1) using different advisers for the taxable and tax-deferred portfolio without strict instruction could result in a balanced portfolio in each, (2) placing US based securities in TFSAs causes dividends to be subject to irrecoverable US withholding tax which is not the case for RRSP and (3) treating spouses’ portfolios separately “can miss the opportunity to lessen the family’s overall tax bite by purchasing Canadian preferred and common stocks in that account to better exploit the enhanced dividend tax credit”.

In Business Insider’s “Retirees are greatly underestimating how much they’ll need to save for healthcare” Mandi Woodruff reports that according to a new Fidelity estimate there is good news and bad news on healthcare cost of a 65 year U.S. old couple retiring this year. First the bad news: they’ll need $220,000 for medical care. Now the good news: cost is 8% lower than last year. (Thanks to MB for recommending.)

Real Estate

Canada’s April 2013 Teranet-National Bank National House Price Index  indicates that Canadian home prices increased 2% over previous 12 months, “the smallest 12-month rise since November 2009”. Quebec City had the highest YoY increase at 6.1%, while Ottawa and Toronto were 1.5% and 4.3% respectively. Vancouver and Victoria were bringing up the rear with losses of -2.9% and -3.3% respectively. Month over month changes in the negative territory were recorded for 5 of the 11 cities: Ottawa (-0.2%), Vancouver (-0.8%), Victoria (-0.1%), Quebec City (-0.5%) and Halifax (-0.1%).

In the NYT’s “Today’s dream house may not be tomorrow’s” Robert Shiller does an interesting exploration of what houses represent to people, writing that “houses are just buildings, but homes are often beautiful dreams. Unfortunately, as millions of people have learned in the housing crisis, those dreams don’t always comport with reality.”  He questions/warns about how well (price/value) expectations will be matched by reality after a decade given economic, demographic, taste/fashion/desirability, urban vs. suburban and rent vs. own preference changes are factored in.

In the Globe and Mail’s “US bills propose longer stays for Canadian vacationers” Wingrove and Hui discuss proposed increases to length of permitted annual US stay for Canadians up to 8 months if they can demonstrate that they have a Canadian home, own or lease US property and promise not to work or go on welfare.  However article reminds readers that while Canada has no federal restrictions on how long each year one can be outside the country, provincial eligibility for health insurance has requirements of 5-7 months presence in the country/province. The other problem is the US requirement of filing and paying US taxes if Canadians stays in the US more than six months.

Pensions and Retirement Income

In the Financial Post’s “No pension savings crisis: Canadians have $7.1T in net worth” Lee and Jog disagree that Canadians aren’t saving enough and that they must be forced to save more for their retirement. They argue that the “inadequate savings” arguments exclude real estate (including principal residences) and business ownership components of assets; including these components, based on Stats Canada data, total assets come to $8.8T less $1.7T indebtedness, leaving $199,700 per person. The $8.8T is 40% real estate, 42% in “cash, mutual funds, equities” and 19% in registered pension plans. They argue that including all assets and factoring in that seniors represent the majority of those with mortgage free real estate, there is retirement income problem in Canada. (Since we are just speaking about averages, the $200K per person might be theoretically converted to $8,000/year in indexed pension or annuity (if such beasts were available in Canada), and add that to average CPP of about $7K and OAS of $5K for a total of $20K per person. However to really understand the true state of affairs one would have to break down the population into wealth segments to really understand who holds these assets, and factor in the impact on prices if boomers would really try to sell their principal residences/real estate when they turn 65. And by the way, “reverse mortgages” are not financial “innovations” but transfer mechanisms of the value of one’s home at a low price to mortgage holder. Incidentally Garry Marr’s “Are all our eggs in the housing basket?” discusses the risk of having $3.5T of $8.8T Canadians’ assets in real estate and that reverse mortgages have 5-year rates of 5.4% compared to as low as 2.7% in traditional ones. Segmenting the population into categories like assets deciles and those with or without indexed public sector like pensions might provide a better understanding of whether Canada has a pension crisis or not. For example, using the numbers discussed in the article and adding the not too unreasonable assumption that the top three net worth deciles own 80% of the wealth and the bottom three deciles have zero net worth, then the remaining four deciles have a net worth of $1.42T divided by 14.2M Canadians in those four quartiles then we get $100,000 rather than $199,700 per person. The number would be even smaller for the average Canadian. I think this topic is important enough to deserve a more analytical treatment than used in this article to reach its conclusion. I have no doubt that the Canadian Pension system” is systemically flawed and one of the problems is that the average Canadian is not saving enough for retirement.)

In The Financial Post’s  “Surprise! Annuities beat RRIFs” Fred Vettese writes that based on his calculations he was surprised to learn that annuities are superior to RRIF not just at age 75 but also at much younger ages. Many readers might conclude from this article that annuities are the universal solution to (almost) all retirement income needs independent of personal circumstances (age, health, other income sources, risk tolerance, family situation, etc). To conclude that based on this article without a personalized second opinion from an independent financial expert source would be a grave error. He provides two examples. The first example is based on a 64 year old male who can get a $6,500 annual annuity income stream from $100,000 whereas drawing the same amount from a RRIF invested in stocks and bonds earning 5% after fees, the RRIF would be exhausted by age 92; a more conservative investor who invests primarily in bonds earning nowadays 2-3% would run out of money in his early 80s. (There are many problems with this simplistic analysis, perhaps the most obvious one being the use of a 64 year old male’s annuity rate rather than a joint rate as the basis of the calculation since if that male has a spouse he would leave the spouse a pauper once he dies.) From the description of the second example, I didn’t understand what actually was being done. (Other issues to consider are: how inflation erodes the fixed income annuity payment over 20-40 year retirement, the need to make the annuity decision based in the context of a personal financial plan, the  difference between  insurance (annuity) and  investment (RRIFs contain investment products), and so on. Mr. Vettese is Chief Actuary at Morneau-Sheppell which also happens to be the administrator of the  remains of the Nortel pension plan to be wound up sooner or later; at windup thousands of these pension plan beneficiaries will be required to make the critical decision between RRIFs/LIFs and annuities. Given the importance and seriousness of such a topic (e.g. given the irreversibility of a decision to annuitize) this merits a more nuanced analysis/discussion of the annuity vs. RRIF/LIF decision factoring in individual circumstances; perhaps Mr. Vettese is planning a follow-on article on the subject? I have given a shot to the subject in Annuity or Lump-Sum (LIF): Upcoming Nortel pensioners’ decision, but couldn’t readily conclude that annuities were superior except in specific circumstances. In Canada, unlike in the US, unfortunately you can’t buy a longevity annuity, which would allow the best of both worlds protect yourself against running out of money while not having to annuitize all/most of your assets.)

In the NYT’s “Getting the full picture on annuities and insurance” Paul Sullivan reminds readers that life insurance and annuities are insurance products “but right now, both are being promoted for their tax benefits…


Many policies carry high upfront and management fees, have limited investment options and penalize people” in case of early withdrawal.

” (People tend to forget the general rules of thumb: insurance is not for investment, insurance is for protection; e.g. life insurance is to protect those who are dependent on your earnings which disappear with you when you die and an annuity is for those who hit the age where there is an unacceptable risk that their assets will be insufficient to meet their basic needs before the end of their life. A great article; thanks to KW for recommending.)

In Lasalle Messager’s “Remember working in Lachine Wire and Cable”  Gladys (Murray) Comeau has a letter to the editor imploring her neighbours living in the part of Montreal which was the home of the old Northern Electric Lachine plant, to write to Prime Minister Harper and Minister of Industry Christian Paradis. She writes that “They must be called to task for their indifference to what we have suffered following Nortel’s collapse and for their government’s inaction and disinterest”…She continues that the pensioners’ demand that the government stop post-filing interest for junk bondholders and that “The inconsistencies in the Companies’ Creditors Arrangement Act (CCAA) and the Bankruptcy and Insolvency Act (BIA) wherein there is inequality and no balance between creditors must be addressed.” (Comeau indicated in a separate letter to Prime Minister Harper that she is a surviving spouse of a 41 year loyal Nortel employee whose life has forever been altered by the impact of the insolvency and who needs the survivor pension, which is her late husband’s deferred wages, to continue to live her simple life and not become destitute. Could you believe the arrogance of the bondholders in that they demand post-bankruptcy interest? If this wasn’t illegal, it should be. It’s an outrage. What’s even worse is that the Nortel pensioners have effectively given up the fight over getting priority in bankruptcy relative to unsecured creditors, and now have to fight over unjustified bondholder claims for post-bankruptcy interest on the bonds; how pathetic is that!?! )

Things to Ponder

The WSJ’s “Fed maps exit from stimulus” discusses the fed’s tentative/uncertain exit/unwind plans from QE, but Martin Feldstein also in the WSJ argues in “The Federal Reserve’s policy dead-end” that QE is overrated in its contribution to increasing market prices since 2009 (increasing earnings per share were primarily responsible). “The Fed’s balance sheet has grown by less than $2.5 trillion since the summer of 2007, while the federal debt has grown by more than twice that amount just since the beginning of 2009. As a result, the public has had to absorb more than $2 trillion of net government debt during the past three years…I think the risks are now clear and the benefits are doubtful. The time has come for the Fed to recognize that it cannot stimulate growth and that a stronger recovery must depend on fiscal actions and tax reform by the White House and Congress.”

In the WSJ’s “Man vs. Machine: The great stock showdown” Joe Light discusses a new measure to pick consistently better performing active funds the upside capture to downside capture ratio; but he concludes that “…don’t forget that the most proven indicator of future returns continues to be low fees… The easiest way to minimize costs is to dismiss active managers altogether and simply use low-cost index funds. As hordes of researchers have said, the efficacy of low fees is something you don’t need two decades of historical research to prove. It’s just arithmetic.”

In the Financial Times’ “UK taxmen, police and spies look at Bitcoin threat” Jane Wild reports that  50 civil servants participated in a meeting “entitled The Future of Money, focused on the implications that widespread adoption of the currency might have. As Bitcoin users are anonymous, authorities worry that it could be used for purposes such as money laundering, and that transaction between individuals fall outside boundaries of tax collection.” (Of course Bitcoin-like currencies also undermine governments’ claim to be the only ones having the right to issue legal tender in their respective countries. It is unlikely that governments would stand by idly if such ‘virtual currencies’ would start to have broader acceptance. For example see this report “Here’s why the Feds seized assets from the world’s biggest Bitcoin exchange” )

And finally Gillian Tett’s review of David Stockman’s new book “The great deformation” in the Financial Times’ “How the Fed lost its cred”  she summarizes it as “the American government has badly lost its way in the past few decades, because crony capitalism has perverted policy making and upturned free market principles. As a result, the country is now drowning in uncontrollable debt that will eventually bring it down and destroy the credibility of the Federal Reserve… on my travels across the country I was struck by how many people – be they economists, businessmen or cab drivers – volunteered a sense of unease about the central bank.”



  1. Do you need a Financial Plan?

    The entire financial industry tells you constantly that you MUST have a financial plan. What they often mean by that is you must set up to deposit “X” amount per month with your financial planner. That’s what they really want you to do. The details of the plan are secondary to the fact of giving your advisor more money each month.

    I built a million dollar portfolio. My only plan was to maximize the government savings programs (RRSP, RESP and TFSA). And then to get the highest returns. No written financial plan, just a goal to get rich.

    Most of us did not get our jobs by having a financial plan or a written life plan. Similarly we don’t really need a written financial plan.

    What counts is action not the plan Save a decent amount of money each year (maximize government plans if you can) and try to earn good returns and you should do okay.

    Financial plans that project some known return are a waste of paper. The future is uncertain, plan or no plan.

    It’s not that a financial plan is a bad idea. It’s just that it is not a requirement. You can certainly retire wealthy without some detailed written plan.

  2. Hi Shawn,
    Yes…the financial industry might pay lip service to a financial plan but few broker/advisers actually offer an Investment Policy Statement (IPS) to investors…but I think that the financial plan in the form of an IPS is a roadmap to a successful retirement…life is full of surprises and ‘luck’ and good fortune has much to do with the outcome, but if one doesn’t know where they are going, then any destination will do but once there it may not be very pleasant…people have different temperaments and an IPS would be valuable to most investors…an IPS takes considerable work yet it would be one of the most valuable services provided by the financial industry since it includes required savings rate, withdrawal rate, asset allocation and portfolio implementation consistent with the investor’s risk tolerance to drive toward the investors goals and objectives…it’s not impossible to retire successfully without an IPS but why not increase the probability of achieving one’s objectives.

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