Contents: Advisers for all, picking a financial planner, retirement date risk, snowbirds and taxes, ‘smart’ beta= dumb beta + smart marketing? mutual fund fees? foreign investor driven Miami condo construction, Roubini on housing bubbles: Canada is in, Canada’s real estate rebound? re-insurance industry fears for coastal cities, Feds put an ideological stake in the heart of the expanded-CPP- will the provinces capitulate? DB and DC pension convergence is the solution? retirement plan safety improves by: savings targeting income and income risk coupled with outcome oriented communication, differences in OECD countries pensioners’ income sources, advisers busy with re-planning public sector pensioners’ retirements in Detroit and Illinois, DB pension shortfalls paid by cross-generational transfers from the young, SEC fiduciary standard delayed, RRIF management at times counterintuitive, “humans don’t all want or need the same thing” in healthcare (and pensions)? here comes global wealth tax?
Personal Finance and Investments
In InvestmentNews’ “Nobel laureate: Everyone should have a financial adviser” Liz Skinner reports that Robert Shiller argues that “people make better decisions with financial advisers” and “professional financial advice is a service that should be made available to those without the resources to pay for it, through a Medicaid-type approach”.
In MoneySense’s “Find the perfect financial planner” Preet Banerjee discusses the meaning of fee-only advice, why fees matter, the where is the value that financial adviser might provide (the plan separate from its ongoing management), and how to go about selecting a financial planner/adviser. MoneySense has a list of fee-only financial planners that may give you a place to start looking if you are interested in such a model, but you’ll have to investigate whether other potential conflicts (e.g. product sales) might exist. The article includes a discussion of the challenges of investment advisers with the “pure fee-for-service” model. (Would it not be nice to have a world where you could go to a financial planner/adviser who doesn’t sell products and works exclusively on a fee-for-service basis while acting as a fiduciary in managing the affairs of the client? Is this utopia?)
In the Journal of Financial Planning’s “Understanding retirement date risk” Michael Kitces looks at retirement risk in terms of a date-risk rather than a wealth-risk. “The takeaway here is to recognize that the more reliant the plan becomes on returns—whether due to using high-risk, high-return investments, or low savings built on an extremely long time horizon—the greater the risk to the retirement date itself, and the greater the likelihood that the outcome could be materially different than originally planned… a shorter (or more conservative return) path may require greater savings, but it also has less risk about whether the target retirement date will be achieved” (This is related to the topic of ‘time diversification’ or whether the risk of a stock portfolio decreases with time (or not) as discussed in my “Time Diversification: Stocks are less risky over the long-term??? (Not!)”)
In the Globe and Mail “The tax implications for snowbirds of a proposed longer stay in the U.S.” Kira Vermond discusses further tax problems with the stillborn US legislation allowing “Canadian retirees 55 and older who were willing to spend at least $500,000 on a residence could spend up to 240 days in the United States without a visa”. Vermond argues that the legislation will likely be resurrected next year but the collateral issues with such legislation must also be dealt with before the benefits of the so-called “Canadian retiree-visa” can be realized: disconnect between tax and immigration laws in the US, required changes in Canadian tax and provincial health insurance laws. (Are there really that many people interested in staying 8 months rather than 6 in the U.S.? Not obvious; for me the choice is escape Canadian winters (4-6 months max) or move to the US for good say if elderly parents need/want to be close to their children?)
In the Globe and Mail’s “GMO’s James Montier takes issue with equally weighted indexes” David Berman quotes Montier that “smart beta is dumb beta plus smart marketing“ whether it is equally weighted or profitability weighted. He argues that whatever outperformance did occur had nothing to do with the story told but as a result of ‘value stocks’ and ‘small-cap stocks’.
In the Financial Post’s “How to save hundreds of dollars on portfolio fees” Martin Pelletier looks at how to navigate through Canadian mutual fund fee structure which he calls “convoluted and overly complex” and recommends that investors should go the route of Class F funds without the embedded trailers and pay the ‘adviser’ a separate ongoing fee for the advice. “A good fee-based advisor provides a lot of value, but the average investor should pay no more than 1.5% to 1.75% in total annual fees and a high net-worth investor no more than 1% for such services as we think that adequately compensates both the advisor and the fund manager.” (Even better, is to never buy mutual fund; I haven’t bought one for more than a decade and haven’t owned one for years. If you need advice and portfolio management service, get it from a fee-only advisor who implements portfolio with passive indexed based ETFs, not mutual funds. And, costs should be kept well under 1%.)
In the WSJ’s “Overseas money pours into Miami real estate” Campo-Flores and Dougherty report that Miami condo development is taking off again “fueled by foreign investors looking to park their money in U.S. real estate…Now nearly all the once-vacant units are filled up, and demand is outstripping supply. There are 118 condo towers proposed in the Miami area, including 35 under construction”. Developers are hoping that new financing models, requiring buyers to put down over 50% before closing, will prevent repeat of the 2003-2008 real estate fiasco in Florida leading to 60% price collapse. Most of the buyers are still investors but their expectation is to be able to rent out rather than flip the units. “About 85% to 90% of new-construction buyers are foreign, mostly Latin American…”
In Nouriel Roubini’s “Back to housing bubbles” he discusses countries (including Canada though not the US) where real estate prices are approaching bubble territory. Roubini writes that the “Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt. In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates. Given anemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices.” These countries preferring not to fight rising asset prices with interest rate policy, are trying to do it with modest “macro-prudential policies” that have been inadequate in achieving the bubble control objective. He notes that it feels like watching a “replay of the last housing-market train wreck”.
Speaking of a potential Canadian housing bubble, Tara Perkins in the Globe and Mail’s “Rebound continues in Canada’s housing market” reports that Toronto sales were up 13.9% and prices at almost $539K were up 11.3% over year ago. Calgary and Vancouver sales were also up 19% and 38% respectively. (Well it’s not a rebound but more like continuing to fire on all cylinders. The rebound might be in reference to an increase in sales from temporarily lower volumes resulting from last year’s mortgage rule changes. I think I may have seen this movie in Florida between 2000 and 2006.)
In the Globe and Mail’s “No climate-change deniers to be found in the reinsurance industry” Eric Reguly has an in-depth article on climate-change risk from the perspective of re-insurance companies that “The higher frequency of extreme weather events is influenced by climate change; and recent climate change is largely due to burning hydrocarbons.” And Munich Re’s head of geo-risk research argues that “I’m quite convinced that most climate change is caused by human activity”. The article also notes that “…if the massive Western Antarctic ice sheet slid into the sea, it would raise sea levels by two to three metres, inundating vast numbers of coastal cities.” (Those enjoying views from their Florida ocean front condos might skip a heartbeat or two while reading this article and realizing that after more than a decade of discussion/promises on how to protect oceanfront property from the encroaching ocean, absolutely nothing but band-aids (e.g. dune replenishment) have been applied. Not a surprise given that politicians’ interest horizon stretches at most to the next election, and spending voters’ money in the politician’s current term that will provide benefit in 20-50 year time-frame makes no political sense.)
Pensions and Retirement Income
In the Globe and Mail’s “CPP expansion would cost Canadians too much, federal minister says” Bill Curry reports that days before the federal/provincial finance ministers meeting the Conservative government argues based on a Finance Canada analysis that higher mandatory employer and employee CPP premiums “would have a negative impact on the economy because higher labour costs would mean less hiring by businesses. Ottawa’s preference is to encourage more savings through voluntary pooled registered pension plans (PRPP)”. According to the article Quebec National Assembly passed this week legislation to enable Canada’s first PRPP next year; the Quebec legislation requires all employers with more than five employees to enrol emir employees who in turn can opt out of this RRSP-like savings program to “be managed by the private sector groups such as life insurance companies.” The gauntlets are down with PEI threatening not to introduce PRPPs unless an expanded CPP is also introduced (and while Ontario has threatened to proceed with its own CPP-like program if there is no expanded CPP, yet strangely issued last week a call for comments on PRPPs). A poll of members of CARP (Canadian Association of Retired Persons) suggests that “Reasons to oppose CPP increase don’t hold water, just ideology”.
In the Financial Times’ “No place for envy in pension debate” Stephen Foley discusses the pension envy debate between the public ( DB) and private(DC) sector pension participants and writes that “Where we must head is a world where DB pensions look a little more like DC ones, and DC plans look a bit more like DB ones.” The article also looks at some of the pension reform approaches that are being discussed in the public and private sectors, but the article highlight is the humorous folk tale reflective of the current atmosphere “resulting from the wide gulf between public and private pension systems” which goes as follows: A farmer, distraught over the death of his most productive dairy cow, goes out fishing and catches a magic fish. Bargaining for its life, the fish says it will grant the farmer anything he desires. His request? “Kill my neighbour’s cow.””
Also in the Financial Times is John Hutton’s “We can start making retirement saving safer straight away” article in which he opines that the Collective DC plans (CDC) recently proposed by the UK pensions minister is not all roses since: risk is transferred (between generations) not reduced, distribution of the funds is unclear and changeable, scale benefits are no greater than in similar sized DC plans and significant regulatory changes would be required. Instead he suggests that it would be better to “design investment strategies that target income…and manage income shortfall risk”, framing member communication in terms of “outcomes and risks in income terms” and “use this connection to encourage members to save more and be prepared to work longer”.
The Economist’s “How pensioners pay their way” has a very interesting graph showing “income sources of people aged over 65” (government transfers, work and capital) in OECD countries with 60% being the average from tax-financed transfers. Chile is the lowest at <10% from transfers, Canada and US are the next lowest at just <40%. (Note that this is not an indication of preretirement income replacement rate, just an indication of the retirement income sources. In Canada the transfer sourced replacement rate is much lower than in the US, which probably explains some of the need for higher proportion of capital sourced income in retirement.)
In InvestmentNews’ “Advisers help clients prepare for sharp decline in pension benefits” Darla Mercado explains why Michigan and Illinois financial advisors will be busy re-working the financial plans of public employees: in Detroit the bankruptcy judge gave a green light to the municipality to reorganize under Chapter 9 bankruptcy protection and Illinois legislators passed a bill which “trimming cost-of-living increases for retirees, placing a cap on the salary levels used to determine pension benefits and offering an optional 401(k) plan for current workers. Employees 45 and under will have their retirement age pushed back on a sliding scale.”
In the Financial Times’ “The young get the worst of Britain’s cost of living squeeze” Chris Giles answers the question “with a growing economy, why are living standards still falling?” in Britain. Population growth is responsible for transforming a 14% GDP growth into an only 7% per capita increase between 2002 and 2012, but “but neither median nor mean household living standards went up”! The reason is that “the total cost of employment has kept pace with output per worker even as salaries have slipped… (primarily due to) increased pension contributions”. Of course this is effectively a cross-generational transfer from the younger current workers to the pension recipients. Giles indicates that “equal pay for equal work would suggest lower pay for those with final salary pensions’.
Things to Ponder
In InvestmentNews’ “SEC puts fiduciary duty on 2014 agenda as ‘long-term action’” Mark Schoeff Jr. Reports that the SEC move fiduciary standards for brokers onto 2014 agenda and so has the DOL. This was to be expected, but what was interesting is one of the comments on the article arguing that fiduciary level of care is incompatible with a transactional relationship, so why not instead require that all interactions/transactions with brokers be accompanied by an explicit statement that brokers are: “not fiduciaries, do not have duty to place clients’ interests ahead of their own and are not primarily providing investment advice”. This is an interesting suggestion (and while a fiduciary level of care would still be far superior), but this recommendation could and should be implemented immediately while the fiduciary decision is being considered (ad nauseam).
In the Globe and Mail’s “In withdrawal mode? How to manage a RRIF” Paul Attfield discusses the lack understanding in the financial community about the special needs/considerations during decumulation in general and with RRSP/RRIFs in particular. While each individual’s situation may be unique, strategies need to be developed on: asset allocation and location (tax-deferred, non-taxable or taxable), where withdrawals should come from first, etc. Most advisors recommend tapping first taxable accounts, but some in fact suggest exactly the opposite because one might end up with withdrawing moneys from tax-deferred accounts at the highest rates particularly upon death. Also by taking some of the income from tax-deferred sources early, future draws will be lower and might help avoid later the feared OAS claw-back. The challenge is to find the best mix and timing of retirement income sources to maximize after tax benefits from available assets.
A WSJ opinion piece entitled “Obamacare’s plans are worse” argues that under the Affordable Care Act (Obamacare) policies have higher prices but offer less medical choice. But what I found particularly interesting/revealing is the (obvious) comment that “humans don’t all want or need the same thing”. That may be the Achilles heel of all big government mandatory programs whether they are health insurance or pensions (in Canada and the US).
And finally, in the WSJ’s “The coming global wealth tax” Romain Hatchuel writes that “households from the United States to Europe and Japan may soon face fiscal shocks worse than any market crash” and that according to the IMF the revenue maximization rate for OECD countries are income tax rates of 60%! One example of skinning this cat is the IMF suggestion that “a 10% levy on households’ positive net worth would bring public debt levels back to pre-financial crisis levels”. Hatchuel writes that “…powerful economic players are deciding that with an ever-deteriorating global fiscal outlook, conventional levels and methods of taxation will no longer suffice. That makes weapons of mass wealth destruction—such as the IMF’s one-off capital levy, Cyprus’s bank deposit confiscation, or outright sovereign defaults—likelier by the day.” (For the same reason that bank robbers rob banks because “that’s where the money is”, will thrifty retirees who saved for their retirement and are now victimized by the current financial repression, see their assets be confiscated next by wealth taxes? Time will tell.)