Contents: Act on underfunded retirement, emergency rooms, advice/advisers/planners vs. products/salesmen/brokers and fiduciary care, Bogle: must be a fiduciary if touching other people’s money, online automated advice, Canadian banks reject Power-of-Attorneys, home prices in Canada: off -0.1% MoM but still up 3.4% YoY, U.S. foreclosure activity lowest in 8 years, pension reform: expanded CPP? judge surprised: Nortel estate consumed by legal/professional fees while pensioners/disabled watch in disbelief, best investor Buffett’s recipe for success, “top 1%’s” income share: Canada 10% while U.S. 20%, dementia: treatments failed but prevention can work.

Personal Finance and Investments

In the Financial Post’s “Underfunded retirement? Go cold turkey on spending” Michael Nairne quotes a recent McKinsey report which indicates that “41% of older, high income Canadians are not on track to maintain their standard of living in retirement…” Their “conservative definition of an adequate retirement income, they define it as being able to maintain 65% of pre-retirement consumption”. His advice: take stock of current situation (“household balance sheet and income statement” and “projected budget”), “go cold turkey on spending” (get rid of cottage, multiple vacations, expensive cars, etc), watch investment risk near retirement and delay retirement. (All starts with understanding where your money goes…all of it!)

In the WSJ MarketWatch’s “10 things emergency rooms won’t tell you” Jonnelle Marte’s list (it’s U.S. based but some items are applicable to Canada as well) includes: importance of self-advocacy (don’t just sit there and be patient), shorter wait times sometimes mean risky “short-cuts”, the riskiest procedure is change of shift, too many (CYA) tests, “the huge bill is just a bluff” and “it’s cheaper down the street”. And for those interested in the last couple of items on the list you should  look at  The True Cost of Healthcare website on the subject of cost/price of medical procedures in the U.S., it also talks about who are the real culprits responsible high medical costs in the U.S. (The latter website is a true revelation and while not the subject of emergency health insurance for Canadians travelling in the U.S., it answers why you must not travel without such insurance.)

In the Financial Times’ “Cynicism is the best defense against mis-selling” Jonathan Eley discusses the £28M fine levied on one of the UK banks for its dealings with retail customers. The banks are not your friends; they are there to sell you products (e.g. mutual funds) in order to make money off you. He explores assorted proposals (e.g. “financial education, regulation and competition”) to ameliorate the situations and then concludes arguing that the banks “aren’t going to change, so we should. Next time you deal with a bank or an insurance company, imagine you are being served by either Arthur Daley or Gordon Gekko – and modify your behaviour accordingly.” (That certainly good advice, but due to information asymmetry, the investor has a scant chance of critically evaluating what he is being sold. I seem to recall that in the 60s and 70s the government declared certain automobiles, which due to their design flaws, where dangerous/unsafe and unfit for sale; where is the equivalent unsafe to your wealth/retirement effort by the government.)

In InvestmentNews’ “Industry must draw a line between brokers and financial advisers” Trevor Hunnicutt reports that TD Ameritrade’ adviser advocate argues that: media is at least partly responsible for investors’ confusion by calling brokers advisors, which they are not, there is room for both broker and advisor roles, there is room for booth commission and fee-only business models, but won’t address the ‘fiduciary’ issue which is the fundamental difference from investors’ perspective between brokers (salespeople of financial products) vs. financial advisers/planners (who must be fiduciaries i.e. always working exclusively in the clients’ best interest) ). But in Reuters’s “COMPLY- U.S. regulator intensifies scrutiny of fee-based accounts” Suzanne Barlyn discusses the conflicts that brokers struggle with even when they switch to fee-based models which might come with fiduciary level of care- e.g. fee-based is often more expensive than transaction based. (On the surface some of the arguments about who can call themselves an adviser and what is her responsibility might make sense, but right now the investor doesn’t understand the difference, and often one person masquerades one moment as a broker and next moment as a real adviser; when you go to buy a car it is clear that the salesman is not a fiduciary but that is not clear when you buy your mutual fund, insurance or other financial product. If it walks like a duck, and quacks like a duck, then it is a duck. Fiduciary requirement should not be negotiable for anyone allowed to call themselves an ‘adviser’; of course advisor qualification is table stakes, but acting as a fiduciary would result in lowest cost and appropriate portfolios delivered by the advisor in the context of business model conducive to delivering on the fiduciary promise.)

And in InvestmentNews’ “Apply fiduciary duty to anyone “touching other people’s money’” Mark Schoeff Jr. reports that John Bogle called on regulators that “There has to be at some point a great willingness of the government — particularly the SEC and also the Labor Department — to take responsibility for making sure that if you’re touching other people’s money, you are a fiduciary…He argues that this fundamental principle must be the starting point, and if necessary certain “accommodations would have to be made in fiduciary duty rules that allow brokers who are strictly sales representatives to continue to do their jobs.”

In InvestmentNews’ “SigFig unveils new platform for managing investment portfolios” Trevor Hunnicutt discusses developments at SigFig, an online adviser, which is expanding its current free offering to a very low-cost fee-based ($10/mo for those with assets >$10.000) portfolio management service working through major custodians (Schwab, Ameritrade, Fidelity). The new “premium service will make changes for its users automatically, investing in low-fee exchange-traded funds. Those investment decisions will be based on asset allocation decisions shaped both by the user and by models developed by the firm’s investment team”. The service is unlikely to appeal to high-net-worth clients but might work well for middle market They seem to deliver you: a merged/unified view of all your investments, an analysis of what you got (risks, fees and performance), an asset allocation based on a risk-tolerance questionnaire without sophisticated financial planning tools, a low-cost ETF based portfolio implementation and with periodical rebalancing, all pretty much automatically.  (I haven’t tried it but U.S. based readers might find it interesting to at least explore such offerings. It might be a lot better than what many investors are doing today by themselves.)

A warning from a reader (WJ) about the surprising lack of ‘power’ that comes with Power-of-Attorney documents when dealing with Canadian banks. In this bizarre story the bank accepted the PoA for in-branch transactions but not for online ones, thus not only forcing the PoA to go to a branch every time a bill must be paid on behalf of the PoA grantor, but the PoA is prevented from investing the available assets at the higher GIC rates only available through the bank’s online investing division. The reader tried to get help from OBSI but this bank withdrew from OBSI participation. The Canadian government has some guidance at “Powers of Attorney (for financial matters and property) and Joint Accounts” on the subject. CARP has a collection of articles from various sources discussing the problem  at: “Pitfalls with Parents: Financial Power of Attorney”, “RBC blocks housebound senior from getting her money”, “Power of Attorney can get messy”, and “Power(less) of Attorney” . Perhaps what works the best, until the mess with banks and PoAs is sorted out, is to visit the typically aging parent’s bank with the parent, while he/she still able to go there, and get the bank to review and confirm (in writing) that the existing PoA will be honoured or perhaps if necessary sign alternate bank documentation which according to some might cause other problems. (It’s amazing that even supposedly simple things can be so complicated.)

Real Estate

The November 2013 Canadian Teranet-National Bank Composite House Price Index  is off -0.1% during the month. November prices dropped in Toronto (-0.2%), Ottawa (-0.2%), Calgary (-0.3%), Montreal (-0.6%) but were up in Vancouver (0.6%). On a YoY basis, prices in 13 of 14 cities still increased, including Toronto (+4.2%), Vancouver (+3.9%), Ottawa (+1.2%) and Calgary (+5.9%), with only Victoria decreasing (-1.4%).

In Bloomberg’s “Foreclosures drop to eight year low as crisis wanes” Dan Levy reports that “Default, auction and repossession notices in November were sent to 113,454 properties, a 15 percent drop from October and the biggest monthly decline in almost three years…Florida filings fell 23 percent from a year earlier after a 46 percent plunge in foreclosure starts. Repossessions fell 16 percent. Auctions rose for the 11th straight month, up 2 percent from November 2012, in a sign that lenders are clearing their distressed inventory as prices rise…”

Pensions and Retirement Income

In the Globe and Mail’s “Tories vote down CPP expansion as seniors warn of waning support” Bill Curry reports that “On the same day that the Conservative majority voted down an NDP motion calling for CPP expansion, the seniors lobby group CARP released a survey showing Conservative support is slipping among its members.” CARP advocacy chief “Eng said seniors feel strongly about the issue even though any changes to the CPP would be phased in and would not affect current seniors.” (This is not a promising prelude to the coming weekend’s finance ministers’ get together to discuss the subject.) As might be expected the Canadian Federation of independent Business funded a survey which concluded that the  “Majority of working Canadians don’t want hike in CPP premiums”. In the other corner the Globe and Mail’s Jeffrey Simpson’s “We need to take the long view on pensions” looks how intergenerational fairness requires that we prepay services for the elderly (including pensions/drugs) because otherwise these will be paid by the (next) working generation through taxes. Simpson supports an expanded CPP to prevent “intergenerational burden shifting”. (However, whether you support an expanded CPP or not, none current proposals solve the problems associated with the Boomer tsunami on the way. Still IF some form of CPP expansion were to take place (federally or provincially), it would be important to include opportunity for all Canadians to participate on a “fully funded basis” as I discussed in “Expanded CPP: Should address the needs of ALL Canadians .)

New approaches to an expanded CPP keep coming. Shirle and Milligan in the Globe and Mail’s “A simple feasible way to expand CPP” argue that the various expanded CPP proposals are too complex so why not leave replacement rate at 25% and just do a U.S. Social Security-like expansion by raising the cap of insurable earnings  from $51,000 to $100,000; this addresses undersaving by middle income Canadians, reduces cost to small business…(Almost any pension reform would be better than the status quo, so long as it addresses: inadequate savings rate (employer and/or employee paying, mandatory and/or voluntary), low cost investment vehicle(s) to accumulate funds for retirement, low cost mechanisms for transforming assets to income by either annuitization (voluntary and/or mandatory) or systematic withdrawal strategies; and let’s not forget the need for protecting trust funded accumulated pension benefits by raising the priority among creditors in case of employers bankruptcy. We could only urge the (federal and provincial) finance ministers (and premiers) to act on some form of pension reform; don’t just stand there, do something!)

In the Financial Post’s “Will Nortel professional fees finally get some examination” Barry Critchley reports that Judge Morawetz after having presided over the bankruptcy proceedings of Nortel for almost the past five(!) years issued a surprising statement that “the court here is in the dark, and I do not want to be in the dark any longer. The time has come, please, to let me know how much this is costing”. Was he not the one (together with Judge Gross from the US side of the proceedings) who was responsible for approving all the payments? “Of the US$1-billion, about 30% (US$323-million) has been paid to the Canadian legal and accounting firms involved. Of that amount, US$55-million was paid over the six month period ended mid-October 2013.” The article notes that a further $50M will be spent by next spring (I’d bet that it will be >$100M additional given the trial prep and participation). The article  suggests that there might be a connection between Judge Morawetz’s sudden discovery (that the parasites don’t abandon the body until it is totally consumed), because of an ex-Nortel employee on LTD sent a letter to the Canadian Judicial Council complaining about: the:  judge’s “apparent failure to control the runaway legal and professional fees”, his “close relationship with the legal and professional members of the Insolvency Institute of Canada”, and “his apparent lack of diligence with respect to maintaining the assets in the Nortel Canadian estate”. The Council’s reply was that these were “legal issues not judicial conduct issues”. (What has been happening to the victims of the Nortel bankruptcy has nothing to do with a “justice system” but a broken “legal system”. I guess it is not just Canada’s pension system that is broken.)

Things to Ponder

In Bloomberg’s “Warren Buffett market-beating skills revealed: Cutting research” Simon Kennedy reports that according to an NBER research report Berkshire Hathaway “has done better than every long-lived U.S. stock and mutual fund ”specifically by achieving a Sharpe ratio of 0.76 compared to 0.39 for the stock market. (Sharpe ratio is a measure of the risk adjusted return, such as (Excess return over the Risk-free rate)/(Standard Deviation of the return) ).“The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap — with low price-to-book ratios — and are high quality, meaning they are profitable and have high payouts.”

In the Globe and Mail’s “Canada’s top 1% take home 10.6% of country’s income” Tavia Grant reports that in 2011 the top 1% earners’ share of income in Canada was 10.6% compared to 7.1% when the tracking started in 1982 and the 2006 peak of 12.1%. In the U.S. the top 1% earners’ income share was 19.7%, increasing to 22.5% in 2012. “The top 5 per cent of earners in Canada held 23.8 per cent of total income in 2011, while the top 10 per cent received 35.1 per cent.”

And finally, in Bloomberg’s “Dementia researchers call for G-8 to focus on prevention” Andrea Gerlin reports that if G-8 countries approached dementia in with a preventative action model as was/is used to fight heart disease “suffering and costs of dementia would be reduced”, because “About half of Alzheimer’s disease cases worldwide might be attributable to known risk factors…”. The preventative actions include: cheap vitamins (B6, B12 and folic acid), and healthy lifestyles (diet rich in fruit, vegetables and fish; avoiding obesity, diabetes and excessive alcohol; and treating high blood pressure).