Contents: Travel insurance underwriting required up front, Vanguard driving lower fees in Canada, retirement risks, high risk-free returns, US housing still rising but more slowly, potential first time home buyers struggling, Florida property taxes to move significantly higher, homes and cars 50% of typical US household spending, pension or lump-sum? Nortel’s Canadian pensioners to be trashed again? 16.5% CPPIB investment return matches passive benchmark, Carney/Lagarde: capitalism may self-destruct, DOL delays fiduciary rule to 2015, getting rid of paper money??? Wealthfront: under 35 prefer automation while over 50 prefer adviser? insurers to pay doctors to follow prescribed cancer treatment??? BlackRock sued over excessive fees, Canadian inflation hit 2% rate, ETF taxonomy, sandwich generation squeezed financially between children and parents.

Personal Finance and Investments

CBCNews GoPublic’s“Travel insurance doesn’t pay for these bank customers”reports that “Three customers who bought travel insurance from Canadian banks are outraged after being left with large foreign medical bills… The banks refused to pay in these cases, based on how the customers answered broad-ranging questions about their health when they bought their policies… In each case, the medical emergencies abroad had nothing to do with any pre-existing conditions they were asked about.” (This must send the shivers through many snowbirds who buy emergency travel insurance when they travel to the US. Without knowing the specifics of the cases, it is time that all travel insurance sold should be fully underwritten before the policy goes into force. And yes, the insurance might be (at most) a couple of hundred dollars more expensive, but it should never be possible to challenge claim after the policy gone into effect. The current situation is unacceptable, never mind that the individual is exposed to massive expenses, but who knows what percent of the insurance companies’ travel policies could be open to such challenge (RBC claims to actually reject just 2% of the claims), is it 2%? 10%? 50%? Does this suggest that “Something’s rotten in the state of Denmark”? Full underwriting is required up front, otherwise you got no idea if you have insurance?!?)

In the Globe and Mail’s“How one ETF company is forcing lower fees in Canada”Gordon Pape writes that Vanguard Canada has become the fastest growing ETF company even though it has relatively small $2.5B assets under management, it added $589M of assets ahead of BMO’ $484M and iShares’ $374M, primarily driven by low cost offering. (The other selling point is that Vanguard is a mutual rather than public company with the interest of fund holders as the prime driver of what and how it operates.) Pape also notes that Vanguard Canada announced plans five new Canada based funds: a local currency exposure world ex-Canada fund (0.25%), two un-hedged developed Europe (0.23%) and Asia Pacific (0.23%) funds, and two CAD-hedged bond ETFs  one covering US market and a global ex-US bond ETF (see Vanguard to expand low-cost ETF lineup ).

In the WSJ’s “Five myths about retirement” Tom Lauricella lists some of the retirement unknowns: when you’ll retire (likely earlier than you think), your expenses will be significantly different than your budget might suggest, and “you’ll regret buying that second home” are among his list.

In ETF.com’s“How to earn a high risk-free return”Allan Roth argues persuasively that the easiest way to earn a good risk-free return is by just paying off your mortgage. The only reason that one might not want to pay off their mortgage is liquidity; i.e.  that it is difficult to get back the money should you need it.

Real Estate

The just released March 2014S&P/Case-Shiller Home Price Indices report +0.9% MoM increase in March and +12.4% YoY for the 20-city composite. The US National Index is up +0.2% during March and 10.3% YoY. All 20 cities in the Composite, except New York, showed an increase during March and all were positive YoY.  In Florida, Miami and Tampa prices increased +1.4% and +0.1% MoM and +16.2% and +10.7% YoY. “Tampa showed the most deceleration – the city posted +13.4% year-over-year in February and +10.7% in March.”

In the WSJ’s“Housing recovery’s missing link: First time home buyers”Kris Hudson reports that only 16% of US home-buyers this year were first time buyers compared to about 25-28% between 2001 and 2007 and as high as 50% in 2009-2010. “Some economists now predict that tight lending standards, high prices and the sluggish economic recovery will keep first-timers from returning in full force for several years. That likely means a slower pace for the housing recovery, already a drag on the broader economy in the past year. And in Bloomberg’s “Yellen has scant power to relieve housing slowdown”  Miller and Stilwell report that “The trouble from the Fed’s perspective is that many of the forces holding housing back are outside of its control. While the Fed can influence mortgage rates through its conduct of monetary policy, it can’t do much, if anything, to counteract the other causes of faltering demand: lagging household formation, stingy lenders and wary borrowers.”

In the Atlantic’s “America’s weird, enduring love affair with cars and houses” Derek Thompson presents some interesting statistics indicating  that 50% of what a typical US family spends goes for housing (33%) and transportation (17%), with only about 13% going for food (at home). What is interesting is that these proportions (though not dollars) don’t vary that much with income level, however these proportions vary quite significantly in other countries. For example in Japan only about 31% is spent on housing and transport but the spend more on food (17%) and ‘culture+alcohol’ (13% vs. US 8%), whereas in the UK they spend a huge 20% on ‘culture+alcohol’.

In the Sun-Sentinel’s“Palm Beach County property values rising about 7 percent” Andy Reid report that “taxable property values of homes and businesses countywide increased nearly 7%”, though there are significant variations in the county, such as Boca is only up 5% while Delray and Boynton increased 9.4% and 8.2% respectively. The article notes that this will likely translate to higher property taxes, and guess who else but non-homesteaders will continue to carry a growing proportion of the property tax burden.

Pensions and Retirement Income

In Bloomberg’s “Your company just tossed a pension hot potato in your lap. What do you do?Carla Fries reports that more companies “eager to “de-risk” their long-term pension obligations are expected to increasingly offer voluntary one-time lump sum payments to former employees as an alternative to a pension’s stream of lifetime income… Pension bean counters can now calculate lump sum obligations using a corporate bond yield for the discount rate, rather than a 30-year Treasury rate… Prudential Retirement estimates that this tweak could reduce corporate lump sum payouts by 5 to 25 percent, depending on the recipient’s age…“ The article includes a link to“Should you take a pension or lump-sum”prepared by a pension advocacy group, but worth reading as some of the points are critical in decision making process: Are your personal (and spouse’s) longevity expectations higher than average? Can you afford to lose some or all of the money? How good are your and your spouse’s investing skills?

In the Financial Post’s “U.S. creditors fighting for lion’s share of remaining Nortel assets” Teresa Tedesco writes that (inevitably) the battle lines are now drawn between Nortel’s US and Canadian creditors, with the US unit arguing for a sales volume based allocation for $5.3B of $7.3B remaining which would result in Canadian creditors, including pensioners, getting 10-11 cents on the dollar. The article also notes that the federal government of Canada missed opportunity to protect pensioners and the disabled by not attaching the necessary conditions to the Nortel patent sales to insure that they are protected. (The federal government also failed to raise the priority of trust funded pension plans in bankruptcy; the vast majority of Nortel’s US and UK pensioners are receiving the most or all of their trust funded pensions up to $50-60K range due to government run insurance guarantees in those countries.)

In the Globe and Mail’s “CPPIB’s active investment plan scores big with 16.5% rate of return” Janet McFarland reports that CPPIB controlled assets increased by $36B to $219B for the year ending March 31, 2014 to a large extent due to the 16.5% return-on-invest for the year; $9.7B of the gain came from currency conversion from for reporting purposes. “…2014 return almost exactly matched the rate of return that would have been earned by a passive “reference portfolio” that simply invested in public stock indexes and government bonds.” Still, the CPPIB chair indicated that it “remains committed to a strategy of increasing investments in private markets, which reduces risk by adding diversity to the portfolio. He said private investments have a lot of “embedded” value that is not easily measured until they are sold.”

Things to ponder

In Guardian’s“Bank of England governor: Capitalism doomed if ethics vanish”Angela Monaghan reports that Mark Carney commented that “Capitalism is at risk of destroying itself unless bankers realize they have an obligation to create a fairer society… bankers had operated a “heads-I-win-tails-you-lose” system… Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself. To counteract this tendency, individuals and their firms must have a sense of their responsibilities for the broader system….. And in the Financial Times’  “Lagarde and Carney let fire at the financial sector”IMF managing director Christine Lagarde  “warned that “a fierce industry pushback” by the financial sector is delaying much-needed reforms and risks destabilizing the global economy” and argued that the financial industry hasn’t changed since the crisis giving examples of money laundering and Libor manipulation.

In Pensions&Investments’s “DOL fiduciary rule delayed until 2015” Hazel Bradford reports that the “proposed (DOL) rule updating the definition of a fiduciary” has been delayed until 2015 and ominously renamed to “conflict of interest rule for investment advice”. An American benefits Council lawyer indicated that “It really has to do with the complexity and the controversy”.

In the Financial Times’ “Paper money is unfit for a world of high crime and low inflation” Kenneth Rogoff argues for the abolition of physical currency (paper money) to achieve two objectives: “eliminate the zero bound on policy interest rates” (I thought we already have negative interest rates after inflation and taxes) and eliminate the problem that a “significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity”.

In an ETF.com interview “Wealthfront’s Nash on being the next Schwab”Cinthia Murphy quotes Wealthfront CEO Adam Nash on how their accumulated assets  increased from $100M to $800M during 2013 because automation “a trait that baby boomers seem generally uneasy with, but that the newer generations are embracing like never before”.   Their client base is 60% under 35 and 90% under 50; with the under 35 group not just being very comfortable with technology and software but actually preferring an automated solution. The over 50 age group “have a heavy bias toward talking to a human adviser”.  Wealthfront charges no fees on under $10,000 accounts and 0.25% on larger accounts. For the price they review your financial situation, asses your risk tolerance and  select an appropriate diversified portfolio, they rebalance and also do tax-harvesting and automatically invest dividends and additional funds deposited to maintain target allocation. Their approach is passive investing in 11 asset classes using the cheapest ETFs. But according to an InvestmentNews article “Older investors turn to the web to manage assets” older investors are also switching to managing own finances with online sources.

In the WSJ’s “Insurers push to rein in spending on cancer care” Anna Wilde Mathews report that  in an effort to “blunt soaring costs and push oncologists to adhere to standardized treatment guidelines” some insurance companies are “offering oncologists a $350-per-month payment for each patient who is on one of the insurer’s recommended regimens…In cancer, insurers and health-care providers have been developing treatment protocols—sometimes known as “pathways”—that are supposed to represent the best and most efficient approaches, balancing cost, benefit and side effects. Insurers are then paying doctors according to how well they comply.” Clinics like the offer “where it makes sense” but are concerned if each insurer will generate different recommendations; also that the “broader push toward a narrower number of regimens might cut against emerging approaches that personalize treatment based on genetic factors”.

In the Financial Times’“BlackRock sued for charging excessive fees” on mutual funds”Joe Morris reports that BlackRock has “four shareholders suits filed over the past three months” for overcharging investors; what is new here is that they being accused of overcharging in the context of sub-advised funds, whereby in one instance for example they ”paid only 74% of the investment management fees it collected to the fund’s sub-adviser…despite doing little, if any, work”.

In the Financial Post’s “Canadian inflation hits bank of Canada 2% target in April for first time in two years” Gordon Isfeld reports that Canada’s pace of inflation has reached 2% in April for the first time in two years, though YoY increase was only 1.5% and primarily driven by 8.4% increase in energy prices.  In Europe ECB president Draghi is still hoping that they achieve their 2% inflation target, but is worried about the possibility of deflationary pressures and is prepares actions to counter them. However Wolfgang Munchau argues that Central Banks should replace inflation targeting with price targeting instead in the Financial Times’ “The inflation targeting orthodoxy has lasted too long”.

And for those of you who were interested in a taxonomy of ETFs but were afraid to ask, you might want to peruse ETF.com’s  “Smart Beta 7; ETFs from inside out” which is Elisabeth Kashner’s “seventh and final installment of a series transforming our ideas about ‘smart-beta’”

And finally, the sandwich generation should pay attention, first with “30% of young adults moving back home” here is a less than 3 minute video discussing the problem of “Why your kids may ruin your retirement” and what you can do about it; you have to write a contract which includes the house-rules. Then in the Financial Post’s“The unexpected costs of caring for your elderly parents”Melissa Leong has an in-depth look at the cost of parents’ long-term care and the impact of the care on their boomer children.  Ms. Leong also has a short but cute video on the very serious subject of how and what questions to ask parents about what she calls the “unspeakable with your loved ones” in  “’Are you leaving me all of your money?’: How to talk to your parents about estate planning”. The unspeakable refers to estate planning: wills, executors, desires of how physical or mental disability should be handled if unable to make medical or financial decisions.