Hot Off the Web- November 25, 2013

Contents: Estate considerations, travel insurance for Canadians, delaying Social Security (and CPP/OAS), crooked advisers, financial planners/’advisers’, errors of the ultra-wealthy, Florida new foreclosures down but auctions up, expanded CPP inevitable? pension fee caps counter-productive, smart-beta risks opaque, Buttonwood conference video clips.

 

Personal Finance and Investments

In the Globe and Mail’s “Want the kids to inherit the house? Avoid these common mistakes” Mark Goodfield discusses some do’s and don’ts on Canadian estates, specifically errors due to lack of knowledge which “result in inheritance conflicts, the payment of additional income taxes and most importantly, prevent parents from achieving their goal of maximizing their family’s wealth”. Some of the errors are: partial transfer of principal residence property to children resulting in a partial sale which then transforms “a tax-free gain into a taxable gain, transfer of non-principal residence to children (e.g. cottage) is also a taxable event resulting in pre-payment of taxes, adding a joint account holder to a bank account and continuing to pay all the taxes on income derived from account.

In the Globe and Mail’s “Heading south? Travel insurance may be the best money you’ll spend” Julian Beltrame quotes researcher that Canadians risk a great deal by venturing to the US and other countries without health insurance. Snowbirds tend to be more likely to purchase insurance than day trippers. “Canadians are accustomed to not worrying about who pays the medical bills; all they need to be concerned about is recovery. In the United States, hospital bills can run as high as $15,000 a day. At that rate, it doesn’t take much time to get into serious money.” “If you are not covered in some manner you are at huge risk of losing everything that you own, and it may not even be your fault. It could be somebody running into you with their car. The costs are enormous in a U.S. hospital and your (provincial) insurance will only pay a small portion of that…” (This is not new, but a great reminder at a time of the year when many northerners are thinking about heading south.)

In the NYT’s “The payoff in waiting to collect Social Security” Tara Siegel Bernard discusses the advantages of delaying the start of Social Security. The advantages over an annuity that you could buy on the market are glaring; “money will buy significantly more income, perhaps 50 percent more for a couple, than buying an annuity through a commercial insurer…(and) These income rates also compare rather favorably to the income you can generate by a diversified portfolio of stocks and bonds”. Siegel Bernard adds the other benefits of delaying Social Security: married couples get free survivor benefits, and inflation protection. (Unfortunately Canadians don’t get the same enhanced survivor benefits as Americans when they delay CPP/OAS, and if they are close to the OAS claw-back point before deferring CPP/OAS any benefits might become illusory once claw-back kicks in.)

In the NYT’s “The cautionary tale of an investment adviser gone astray” Paul Sullivan warns about the great care one must take in selecting investment advisers. Mark Spangler at one point in his career was the “head of a national adviser organization that pushes its members to act in their clients’ best interest”. But his ‘small-time’ Ponzi scheme “collapsed in 2011 for the reason that all Ponzi schemes collapse — clients wanted their money back and he didn’t have it”. After “ingratiating himself” with some wealthy groups (from Microsoft and Immunex), “He pitched the wealthier clients on private deals that would pay them a big return and him a high commission if they succeeded.” But most of these private companies he picked failed. Later he started managing privately some “mutual funds”, where clients didn’t even know what he was investing in, didn’t read carefully and/or understand their monthly statements, and that he didn’t have an independent third-party custodian!  And Mr. Spangler claimed to be a fiduciary!

In the Financial Post’s “Six ways financial planners might not have your interests in mind” Ted Rechtshaffen writes that besides the fees charged, wealth management’s other conflict of interests are from: sales quotas, upfront commissions, selling fear (save more), mortgage/credit life insurance (some of the most expensive insurance products available), getting paid more for selling stock vs. bond mutual funds, hedge fund performance fees. (All valid points, but it is a very unfortunate title, because real financial planners often don’t even sell products, but develop a plan on a fee-only basis with implementation left to the investor.) On a related topic, Rob Carrick in the Globe and Mail’s “Financial planning: Five tips to set you on the right course” notes that: “financial planning is often a come-on for selling investment products”, while many people are too cheap to pay for a plan some prefer to pay for a plan from a trained planner without the conflict of interest of trying to sell you products , and once you have a financial plan it is worthless unless you follow it.

In the Financial Times’ “The rich make the same investment errors as the rest” John Authers reports on a study of the portfolios of 115 wealthy US families, defined as >$90M in assets. The obvious advantage of the wealthy is their ability to accept more risk and investing in: illiquid investments, high minimum investments and the best advisers which may give them some advantages. But their approach and errors are very similar to the less well healed but otherwise knowledgeable investors. Still the real differences were related to their ability to maintain very steady asset allocations, but not during the 2008 financial crisis, which means that they were mostly doing the right thing, rebalancing by buying equities except as the market went in free fall, even though “This (rebalancing) is arguably the cheapest and most effective form of market-timing, involving selling assets that have risen, and buying more of assets that have fallen.” However the top decile of this wealthy group “started liquidating their portfolios a year before the crash”. Authers asks whether they were smarter or luckier or are more conservative than the rest of the group.

Real Estate

in the Sun Sentinel’s “Foreclosure auctions jump in Florida” Donna Gehrke-White reports that even though new foreclosures fillings  are sharply down in South Florida (e.g. PBC down46% from one year ago) “The number of foreclosed homes scheduled for the auction block in October skyrocketed by 76 percent in Palm Beach County compared with a year ago… Lenders are aggressively finalizing foreclosures now that prices have rebounded enough to make the transactions worthwhile.” With increasing home prices finally banks are ramping up their sales of foreclosed properties, but they’ll have to be careful not to “flood the market with homes”

 

Pensions and Retirement Income

In Benefit Canada’s “Why the CPP expansion is inevitable” Greg Hurst explains why he changed his mind and he now believes that the expanded CPP is inevitable, even though better ideas fell by the wayside. The only remaining obstacle is the flawed “idea that the economy cannot afford an increase in the CPP payroll tax”, whereas “The reality of pension reform is that the choice is to pay now or pay more later. If society doesn’t pay more now to ensure retirement income adequacy of retiring Canadians, future seniors with less money will be contributing less to the economy and be more reliant on government for other forms of support such as the guaranteed income supplement.”

In the Financial Times’ “Capping pension fees will raise pension costs” Rupert Pennant-Rea argues that government imposed caps on pension fees have three flaws: discourage competition (incumbents have the advantage discouraging new entrants), providers aim for the cap so even pensions currently charging less might also drift toward the cap, and providers will find ways around the cap by charging up-front and exit fees.

 

Things to Ponder

In IndexUniverse’ “Smart Beta risks not clear enough” Rebecca Hampson interviews Frederic Ducoulombier of EDHEC-Risk who argues that while some of “These newer indices have the potential to deliver significant gains in terms of long-term risk adjusted performance, but they also entail particular risks: such as different factor exposures, different assumptions and methodologies, “Even indices that appear to be following similar strategies have different exposures, turnover and so on.” And most significantly “The problem is that none of these risks are documented well enough. Access to information is restricted, which means investors don’t have the ability to understand and manage these risks.”

And finally, you might be interested in seeing some of the video clips from last month’s (annual) Economist Buttonwood conference “Searching for stability” where the likes of Greenspan, Einhorn, Bremmer, Fink, Shiller, Summers and others express views on the economy, debts, future of US, etc in 2-3 minute video clips. I haven’t had a chance to see them all but the few I have seen were worth the time spent, and I will watch the rest as well.

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