Contents: Are ‘fee-only’ advisers mislabelled? actuarial portfolio expectations: 6% nominal, inflation protection now, retirees’ advice gap, getting closer to national securities regulation in Canada, adviser registries tainted, US real estate up, don’t get carried away with housing as an investment, Palm Beach County listings up 28%, Nortel pensioner CV/LIF takers less equal than annuity takers, legal fees under Nortel bankruptcy court scrutiny, Canada Post pensioners worry-but appear protected, QE’s collateral damage calls for its end, cost of Great Recession is one year of US GDP? Retirement: the good and the bad news, ‘death dinners’.

Personal Finance and Investments

In the WSJ/MoneyBeat’s “Fee-only financial advisers who don’t charge fees alone” Jason Zweig warns investors not to be fooled by the “fee-only” label used by some advisors. For example he writes that of 32,949 U.S. CFPs listed on CFP.net and only 24% called their compensation “fee-only” while 59% indicate “commission and fees” and the rest gave no indication.  “Securities lawyers and government regulators say that an adviser who works for a brokerage firm or insurance company that charges commissions shouldn’t describe his services as “fee only” even if the adviser himself doesn’t charge commissions to his clients.” InvestmentNews’ “CFP Board pulls ‘fee-only’ designation as choice” indicates that the CFP Board changed the 8000 or so advisors indicating “fee-only” to “none provided” requesting the affected advisers “to review the organization’s definition of “fee-only” and restore it if it fits their practice…(indicating) that advisers who are registered representatives, dually registered or work for an insurance firm cannot use the fee-only description”.

In the Financial Post’s “Calculating investment returns: Actuarially speaking, 6% is a good rule of thumb” Fred Vettese opines that 6% nominal return is good guesstimate for the next 25 years for a 40% long-term government bonds, 30% Canadian stocks and 30% International stocks based portfolio with regular rebalancing. The estimate is based on 2.25% inflation, 1.25% real return for long-term bonds, 5.25% and 5.75%real return for Canadian and international equities respectively. Rebalancing adds about 0.4% and management fees subtract about 0.5%. This is about 3% lower than historical nominal return but inflation averaged 4.1% between 1963 and 2012, so real returns are pretty close. But then Vettese notes that the future is unpredictable (even for actuaries). (I am comfortable with the 6% conservative expectation for a balanced portfolio.)

In WSJ’s “Inflation protection for your portfolio” Javier Espinoza suggests that you can’t wait until inflation is clearly visible to protect your portfolio. Some suggest inflation protected bonds, but “they provide virtually no return above inflation”. Others suggest annuities with inflation protection (but much lower starting payout) or without inflation protection (income stream buying power rapidly eroded by inflation) but neither is a good solution. For those who can live with stock market volatility, equities have historically been a good inflation hedge since corporations have some flexibility in adjusting prices with inflation.

In Canadian MoneySaver’s “Retirees: Do they face an advice gap?” Ken Kivenko discusses some of the differences between the accumulation and decumulation phases of an individual’s life-cycle and concludes that there is need to close the ‘advice gap’ among Canadian ‘advisers’ and he identifies a number of considerations: ‘adviser’s’ “conflicted advice and high fees”, complaint process is adversarial and clients are not treated fairly, uninformative account statements and misleading ‘adviser’ titles, product miss-selling led to miss-trust, inadequate  ‘adviser’ “proficiency and expertise in retirement planning” and fiduciary level of care. Kivenko also mentions RetirementAction.com  as one of his two favorite blog, the other being Retirehappy.ca.

The Globe and Mail editorial “Major step toward a national securities regulator” gives credit to Finance Minister Flaherty for persistence in reducing the ‘balkanization’ of Canada’s securities market regulation. BC and Ontario have agree to a ‘co-operative’ approach; many of the smaller provinces are expected to join as well, while Quebec’s current separatist government is unlikely to do so. “…the plan is that there will be a federal statute concerning criminal matters and systemic risks, while the member provinces will pass a uniform statute dealing with all the other matters that the provincial commissions now attend to.”

In the WSJ’s “Adviser registries draw questions about impartiality” Daisy Maxey warns that many online directories claiming to evaluate advisors have “cozy ties” with advisers.” Financial advisers in some cases pay to be included in registries, to upgrade their pages, or to have their pages appear first in search results, all of which raises questions about the impartiality of the sites’ listings and the possibility of abuse.”

Real Estate

The just released July 2013 U.S.  Case-Shiller Home Price Indices showed 1.9% increase MoM and 12.3% YoY “Home prices gains are holding their 12% annual rate of gain established by the two Composite indices in April… The Southwest continues to lead the housing recovery… Following the increase in mortgage rates beginning last May, applications for mortgages have dropped, suggesting that rising interest rates are affecting housing. The Fed’s announcement last week that QE3 bond buying will continue for the time being may have only a limited, though favorable, impact on housing”

David Crook in WSJ’s “Don’t ignore sobering fact on housing” writes that good times in US housing may not be as good as many might have us believe, despite improvement in the economy and unemployment  and housing prices.  He suggests that home buyers’ enthusiasm should be tempered by: sales volumes still being at 1999 levels and 27% below 2005, the “boom” is mostly in states most savagely beaten down during the crash so percentage gains are from low levels, much of the buying is from big business investors (25% of sales in Atlanta and 20% in Tampa) while home ownership rate dropped from 69% to 65%, renters of the new investor unit are likely people who wouldn’t qualify for mortgages, “investing in housing is nothing like buying a home…a market that’s good for investors may not be so hot for you” (cash vs. mortgage purchase, investment comes with cash-flows, tax-advantages for real estate investors, etc)

Still Reuters reports in “U.S. existing home sales rise to 6-1/2 year high” that last month US housing sales surprised on the upside at annual rate of 5.48M is at the highest level since February 2007. Real estate economists trying to manage expectations by suggesting that we “may be experiencing a temporary peak as would-be buyers sitting on the fence are pushed to close deals ahead of likely price and borrowing cost increases.”

In the Palm Beach Post’s “Palm Beach County home listings jump 28 percent, prices up 16 percent”   “New listings grow in Palm Beach County housing market while price gains mellow” Kimberly Miller reports that “A revival in Palm Beach County home prices lured more than 2,300 new listings onto the market last month, a 5-year high that should help replenish an emaciated inventory that is nearly half of what it was in 2012.” The article notes that the price increases to date have motivated “reluctant sellers who were ‘upside down’” previously, to make the move.

Pensions and Retirement Income

My new Nortel pensions: Why CV/LIF value is less than annuity value for Nortel’s Ontario pensioners? blog post attempts to answers the puzzle. According to Ontario legislation CV/LIF is calculated on deemed October 1, 2010 windup date and life expectancy at the time, and some of the CV is considered to have already been collected since then (as pension payments) so it is worth less now. Annuity income is effectively locked in as long as pensioner lives and is guaranteed by PBGF at the windup specified level; so it’s not affected by elapsed time since deemed windup.

In the WSJ’s “U.S. judge taps examiner to review Nortel professional fees” Peg Brickley reports that after legal fees have burnt up over $915M of Nortel remaining assets, U.S. bankruptcy judge Kevin Gross appointed an accounting firm to act as examiner of fees of “dozens of law firms and other advisers” starting February of this year, the beginning of the 5^th year of bankruptcy proceedings and just before the start of the multinational asset allocation trial. The article notes that “Aside from the U.S. Trustee, parties in interest typically have no motive to object to fee requests.”

In the Star’s “The high cost of kicking Canada Post can down the road” Michael Warren discusses the recently announced $5.9B pension deficit of the Canada Post pension plan and the fact that the government missed the opportunity to privatize Canada Post when (CPC was debt free, the pension plan had no deficit and was worth an estimated $1.5B) ­the then CEO Moya Greene recommended privatization. By the way according to the article the CPC pension plan is “taxpayer-guaranteed”. (I came across this article when a very concerned CPC pension plan member’s sent me a question whether he was given bad advice on a mandatory top up, which he acted upon. I am not familiar with the CPC pension plan, however if this article is correct and the plan is “taxpayer-guaranteed”, he probably doesn’t have much to worry. “Fair pensions for all” submission to the Standing Committee on Finance seems to confirm this. I thought perhaps that the questioner might be able to fully confirm this by calling the OSFI which regulates this plan. The reader who asked the question, upon further enquiries, was able to confirm that Canada Post is an ‘agent’ Crown Corporation and with this status all its actions “bind the Crown”, including all contracts, debts and pension obligations.)

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Things to Ponder

In the Financial Times’ “Side effects that should call time on QE medicine” John Authers provides a list of the collateral damage caused by QE. Some of the items mentioned include: lower level of default and less “creative destruction”, currency wars, needed government reforms postponed, increased pension deficits,

In the Globe and Mail’s “Cost of great recession was huge and still growing” Linda Nazareth reports that according to a Dallas Federal Reserve paper “the total cost to the U.S. of the financial crisis was something in the order of $6-trillion (U.S.) to $14-trillion. The top end of this range represents one full year of U.S. economic output.”

In Bloomberg’s “The global quest to save retirement” Ben Steverman writes that “Spend enough time around retirement experts, and the prospect of living longer starts sounding more like a threat than an opportunity.” Increasing longevity is affecting adversely pension plan funding level, Social Security, and makes individual savings insufficient for retirement. The article notes that a “40 year career to finance a hypothetical 50 year retirement may well be an unsolvable math problem”. Of course longevity increases projected now may not materialize, but thing that can be done are: mandatory savings, save more, a little less conservatism in equity allocation near/in retirement, increase retirement age. And of course, longer lives are not a problem but a blessing, if we can lead it in good health. A couple of other related articles on retirement are Bloomberg’s “At 77 he prepares burgers earning in week his former hourly wage” which describes the difficulties though very positive approach of one individual who didn’t save enough for retirement and the Financial Times’ “Retirement will not be the death of you” which reports on a recent study, contrary to previous reports, there is no link between retirement age and longevity.

And finally, in Bloomberg’s “Death dinners at baby boomers’ tables take on dying taboo” Shannon Pettypiece discusses the new trend in “death dinner” parties where the topics of: death, dying, feeding tubes, dying at home vs. hospital, living wills, etc. This is a timely topic as by 2030 3.3M Americans will die each year.