Contents: Is the financial advice business a profession? retirement plan assuming working past 65 is flawed, required retirement income? the truth about fees, travel health insurance a must, life insurance covering LTC costs?  forecasting is difficult-especially about the future, global house prices, Canadian home prices to drop despite strong property buying interest? realtors: Palm Beach home prices up 26%! US ETF assets reach $1.5T but impeded by unrealized mutual fund capital gains, European DB plan deficits dire, public sector pension plans are good so protect them by giving them to private sector, U.S. pension plan opportunities from other countries, good governance essential at mutuals, regulators concerned about hedge funds acquiring insurers, bizarre QE driven conditions are growing tail-risk, gold: buying opportunity?

Personal Finance and Investments

Robert Powell in the WSJ’s “How a pick for a financial adviser can go wrong” reports that unlike when searching for “diagnosis and treatment” of a health issue and likely getting similar assessment from different physicians, the chances are that you are unlikely to get similar financial advice when visiting two or three financial advisers, “and that could make a big difference in your financial future”. Adviser’s business model/context including how they are compensated tends to determine whether you get a financial plan or not and whether the strategy offered is built on funds, stocks and bonds, insurance products like annuities or even some combination. (People might rightly ask whether such wide differences in prescriptions/strategy are because unlike in medicine, in finance: there is no accepted “body of knowledge” or financial advisors (practitioners) are not (required to be or just not) trained/knowledgeable in the accepted body of knowledge or because many are not necessarily working in the investors best interest, i.e. are not fiduciaries? One might even ask if the financial advice business as constituted today- is it a profession?)

In Bloomberg’s “Retirement roadblock: The dangers of magical thinking” Carla Fried warns that people whose retirement plans include  working well past 65 or even in their 70s are setting themselves up for failure. For example a recent study indicated more than 40% of “Americans expect to keep working into their 70s. And the projected retirement age is 68”. In reality average retirement age is 59 and only “16% stop working after age 65”. If you’re using plans of working longer as a means to convince yourself that saving less today is acceptable. “Stuart Ritter, a financial planner at T. Rowe Price, likens saving 3 percent to going to the gym for six minutes; you’re not going to whip yourself into shape.”

Jim Yih in retirehappy’s “How much income do you need in retirement” discusses three approaches to estimating the all important number the required income in retirement: using a rule of thumb like “70-85% of pre-retirement income”, the bottom up approach with “adjustment for expenditures in retirement”, and the top-down approach where starting with net pay then subtract annual savings to get spend rate. He also suggests adjusting estimated spend rate for inflation in particular if retirement is 5 or more years away. (I happen to like the bottom up approach because you can start with current expenditures and then adjust those based on your planned/expected post vs. pre-retirement activities and their costs; things that you’ll: start, stop, or continue doing.)

In the NYT’s “Telling the truth on fees, warts and all” Paul Sullivan writes about one advisory firm’s blunt approach to soliciting clients with: “Let us invest your money. You can count on a return of 3 percent, though there is a chance it will be less. But we can guarantee this return for 10 years… That 3 percent return includes projections on performance of many types of investments but also assumptions on tax rates, inflation and fees — both theirs and those of the outside managers they use.” The firm also likes to express fees in terms of dollars to really shock investors with the impact of fees/costs.

Melissa Leong discusses the need for out-of-country travel health insurance in the Financial Post’s “Only half of Canadians buy travel insurance” including numerous horror stories to illustrate why “don’t leave home without it” is an appropriate approach here.

In the NYT’s “Covering the rising cost of long-term care” Caitlin Kelly writes that “FEW sticker shocks are as bracing as the price of hiring someone to help with the simplest activities — bathing, toilet use, dressing, eating and moving.” LTC insurance industry player reports that the median cost of facility based care in the U.S.  has increased from $67K in 2008 to $84K in 2013. Median assisted living costs increased 4.55% to $3,450/mo over same period, while median national home health aide cost increased from $18 to $19 per hour. The article also discusses sates “pushing insurance companies to make clear to policyholders that they can sell a life insurance policy to pay for long-term care.”

In the Financial Post’s “Comeback in international equities shows forecasting just a ‘guessing game’” Michael Nairne reports that a new Vanguard study shows that “…more than a dozen yardsticks used in market predictions…” have little if any value. Only p/e showed some positive correlation at about 40% on “subsequent 10-year real stock returns… However, even here, the lion’s share of long-term performance is unexplained by current stock valuations.”

Real Estate

In The Economist’s “Global house prices” graphic you can click view changes in house price from the 70s to today in about two dozen countries. Those who doubt that Canada’s house prices might be in a risky territory might wish to look through some of the screen comparing house price indices in nominal, real, relative to average income and rents.

In the Financial Post’s “Canadian home building to plunge by 2015, costing the economy 150,000 jobs, mortgage industry warns” Julian Beltrame reports that Canada’s mortgage industry is concerned that continued regulatory tightening of mortgage lending rules will lead to a 25-30% drop in annual unit construction leading to an overall economic impact of “150,000 fewer construction and indirect jobs in Canada”. (While concerns may also reflect reduction in mortgage industry business, it would be difficult to argue that housing prices or at least price increases in Canada could use some moderation; see previous article.) However another FP article “Almost half of Canadians are keen to buy property, despite cooling market” reports that “…nearly half of Canadian homeowners intend to buy a property in the next five years, despite a cooling off in the housing market.”

In the Palm Beach Post’s “County sales continue to rise at rates concerning some” Kimberly Miller reports that according to local realtors’ association “Propelled by investors buying quickly and with cash, the $265,000 median sales price for a single-family home last month was 26 percent higher than the same period in 2012 and up 6 percent from March… swift price rise can be attributed to increases in sales of higher priced homes and a sharp drop in distressed sales…”With cash sales representing 52% of home and 80% of condo sales, the article suggests that this indicates that corporation, hedge funds and the wealthy are the primary buyers, squeezing out middle class home buyer.

Pensions and Retirement Income

Index Universe’s “Assessing the $1.5Trillion ETF market” reports that U.S. ETF market passed the $1.5T milestone. “…asset gathering in the ETF industry is accelerating, as investors and advisors wake up to advantages of ETFs including low costs, intraday tradability and tax efficiency.” The article also notes that much of the growth in ETF assets has been a “zero-sum” game as funds were flowing out of actively managed mutual funds. but “…in the nonretirement market, longtime holders of mutual funds in taxable brokerage accounts would face immediate capital gains tax consequences if they shifted holdings out of mutual funds and into ETFs.” (Similar effects with similar restraining forces are taking place within the ETF world with assets flowing out of high to low cost ETFs.)

In the Financial Times’ “Divisive pension deficit law may be ditched” Steve Johnson discusses deficits in European pension funds: Ireland corporate DB plans are 81-93% underfunded, UK’s deficits are 24%, and Netherlands’ 21%. Proposed requirements to fix these deficits are feared to result in corporate bankruptcies and loss of jobs.

In Benefit Canada’s “Debunking public sector DB pension myths” or could have been entitled “in defense of public sector pensions” if you were the beneficiary of an OMERS pension or “if it’s so easy to make this work, why can’t I have one of these” if you were one of the vast majority of Canadians who don’t have a DB or DC plan. In the article William Harford argues the case why the answer is not to do away with public sector DB pension plans and instead “…we should strive to ensure (all) employees are able to retire with both dignity and a predictable income in their senior years. Fighting to preserve DB pension plans is one way to accomplish that. (Great aspiration, but the DB train has already left the station for the private sector. Whoever said “that which cannot happen, won’t” was right. This doesn’t mean that we cannot do much better in the pension space if only governments would get of their backsides and institute the necessary pension reforms.) By the way, for those who believe that public pensions are inviolate see “OMERS considering proposal to reduce pensions”.

Steve Greenhouse in the NYT’s “How do they do it elsewhere” compares U.S. pension system with approaches taken in other developed countries from which the U.S. might learn. For example some of the U.S. disadvantage has to do with inadequate savings, relatively easy access to the accumulated funds before retirement and no requirement to annuitize; these being related to an “emphasis on individual freedoms and responsibilities versus collectivism…” But implementation of pension plans should reflect each country’s “culture”, Identity” and “history”, or might be rejected. High fees are mentioned as a topic plaguing even some of the countries which otherwise enforce significant savings levels. Auto-enrolment, but with a worker being able to opt out, is mentioned as being effective to significantly raise percent of contributors and contributions. There are lots of nuggets worth considering for application to pension or retirement income system reform in the U.S. (and Canada).

Things to Ponder

In the Financial Times’ “Bad governance is not mutually exclusive” James Mackintosh looks at mutual (owned by their own members/customers) and writes that while he likes them, they are “not the wonderful solution to the country’s problems”. Mutuals “without competition to keep them honest they are likely to flounder – but this is true of listed companies too. Competition and governance, not ownership structure, matters most.” (I like mutuals, but I agree that they are not guaranteed to deliver superior value to customers without proper governance, management and competition to keep them honest. I am familiar with the value delivered by John Lewis in the UK, and the superior value being delivered by Vanguard in North America. In a public company structure there is the continuous tug of war between delivering value to shareholders, agency costs/drag (self-dealing by management when ownership is separate from management) and the interests of customers which is particularly critical in the financial industry. Mutuals, at least eliminate one of the competing interests thus potentially makes it easier to deliver enhanced customer value.)

In the WSJ’s “Regulators scrutinize firms’ ties to insurers” Spector and Scism report that regulators are concerned about Wall Street growing involvement with insurance companies which guarantee annuity commitments to retirees. Regulators “raised concerns that these insurance companies could be making high-risk investments instead of the basic, steady bets on high-quality bonds traditional insurers usually place with policyholders’ money. Insurers with ties to private-equity firms and other investment firms now account for about 15% of the total fixed-annuity market, up from 4% in 2012… the investment firms are acquiring the businesses at cut-rate prices, and believe their investment savvy with holdings like mortgage bonds, private-equity funds and offbeat investments such as stakes in a professional baseball team will help them make substantial profits…(regulators are concerned that) the nontraditional owners’ higher risk tolerance could end badly if the economy worsens.”

In The Financial Times’ “Phoney QE peace masks risk of instability” Gillian Tett asks “how much longer these bizarre conditions can continue” referring to broken traditional links between: increasing unemployment unusually is accompanied by higher stock prices, downward earnings revisions unusually being accompanied by rising equity prices, credit spreads now decrease with increasing debt, credit spreads don’t increase with uncertainty. The $7T of quantitative easing is the driver which overwhelms all other traditional forces. However “while the flood of central bank liquidity is enabling the system to absorb small shocks, it is also masking a host of internal contradictions and fragilities that could surface if a shock hits”. Tett writes that the “this phony peace” may last for months or years but the “tail risk” is growing. Similarly, Brett Arends in the WSJ’s “Is this the best time for investors? Don’t bet on it” tackles what he calls the “cognitive dissonance” of having both bonds and stocks at all time highs. High stock prices supposedly forecasting very rosy economic times yet historically low interest rates (and very high bond prices) are indicating very weak economic activity. Arends argues that “For the first time in 50 years, U.S. investors in a balanced portfolio of stocks and bonds face the near-certainty that they will lose money on a large chunk of their investments, after accounting for inflation—and a significant risk that they will lose money on all of them.” If the Fed suddenly withdrew the current massive stimulus both stocks and bonds would simultaneously drop, despite the traditional expectations that bonds and stocks are great diversifiers because they tend to move in opposite directions. But today just like in the 40s and 70s, when unlike the 80s when they both rose, balanced portfolios fell and stock bonds dropped together just as recently they rose together. Or, as Edward Hadas writes in the Globe and Mail “The Great Confusion: When uncertainty is the only sure thing”.

And finally, in IndexUniverse’s interview with Peter Schiff  “Gold fools shouldn’t selling” he says that gold is being sold by foolish people and speculators “but gold prices are going much, much higher”. He argues that U.S. government debt is effectively junk and can’t really be repaid, and it will likely be dealt with by default via inflation. He sees the American economy going into a worse recession than in 2008, when the Fed withdraws the monetary stimulus. (Of course there are many more articles nowadays suggesting that gold is a relic of no intrinsic value as it produces no income.) For example, Pimco’s Mohamed El-Erian in the Financial Times’ “We should listen to what gold is really telling us” writes that even though the debate between for and against gold as a suitable part of one’s investment portfolio, the reality is that the “valuation of gold has become completely divorced from its intrinsic attributes” much like shares of other powerful brands like Apple and Facebook. (So there you have it…forecasting is difficult, especially about the future…gold will definitely go up or not.)