Contents: Adviser investment performance, ex-reader calls-it-as-he-sees-it: duty to own family comes before duty to client, benefits of low cost living, dangerous investments, estate distribution and its message, breakdown of costs of investment management, Vancouver/Toronto house prices up-now 25% overvalued- is China’s drive to internationalize yuan a key driver? Canada house price correction would be good for all except older homeowners, US millenials are reluctant house buyers, Florida snowbirds brace for 10% property tax hike, saving for changing Bucket-list, single pension regulator for Canada necessary (but unlikely), Canada’s systemically flawed pension system strikes again, active vs. passive: Fidelity/American losing asset gathering race to Vanguard, insurers use customer finance records in rate setting, where to retire overseas? gold used as medium of exchange to bypass intrusive dollar for international transactions, future of fiduciary duty appears bleak!?! coming moral and financial issues for society, how to slow down in retirement?
Personal Finance and Investments
In the WSJ MoneyBeat’s “Financial advisers: show us your numbers” Jason Zweig writes that if a financial adviser about what returns he can get you, the you have every right to get from him his average historical returns. The CFA institute has GIPS standards designed specifically for reporting investment manager performance. Zweig adds that “Of course, much of the value of a financial adviser can’t be captured by measuring the track record of his investment picks alone. By reducing your taxes, planning your estate and retirement, cutting your debt and adjusting your insurance coverage, an adviser can make you much richer and more secure.”
Some financial industry critics suggest that the industry might not be telling the truth at all times. Here is (what appears to be) an industry insider who tells it the way he sees it. The following email was received by investor advocate and Fund Observer author Ken Kivenko from an ex-reader: “Your anti commission bias is aggravating me. Please remove me from the distribution of the Fund Observer. It is depressing to continuously read all the wrongdoing committed by people like myself. You keep pushing for a Best interests duty- I have one – it is to my family. These sales commissions allow us to have a comfortable life style and provide for a university education for my kids. If investors are too damn lazy to learn about investing they deserve what they get. Despite all your warnings, most continue to invest with us. There is a price for stupidity. It would almost be criminal to let them hold on to their money. Your missives are a growing threat to our way of life. Do you think insurance agents or used car salespersons don’t do the same? At least sheeple investors are making more than a bank deposit or GIC. It’s a win- win for all. Regulators will never move against us- they are even going to allow crowdfunding- watch who ends up making the money. You are like the Man of La Mancha- you have no idea what you are up against. After 10 years of your vindictives, Bay Street still rules. Mike A.” (Wow!)
In WSJ’s “The importance of being solvent” Jonathan Clements defines wealth, not in terms of money but as “the freedom to spend your days doing what you’re passionate about and what you think is important”. He notes that while “the benefits of a fat portfolio are obvious…the benefits of low cost living are…less appreciated” but they include: “easier to save money”, can deal better with loss of job, “need smaller nest egg to retire in comfort” and have the freedom to take a lower paying job that you really enjoy doing. To keep expenses under control: understand all expenses and categorize them into fixed and discretionary costs, get the fixed costs to under 50% of pre-tax income, eliminate low-happiness discretionary items.
In the WSJ’s “Five popular but dangerous investments for individuals” Kirsten Grind warns about funds which: emulate hedge funds and are sold as “liquid-alternatives”, leveraged and inverse ETFs, structured notes (e.g. principal protected notes), unconstrained or “go anywhere” funds, and others.
In the Globe and Mail’s “Distributing your estate to your heirs: The methods and the message” Tim Cestnick lists some of the hows of distributing one’s estate during one’s lifetime or after death, such as: “naming beneficiaries” on life insurance policies and RRSP/RRIFs/TFSAs, joint ownership, trusts, wills, etc. He concludes with a specific piece of advice that while he may agree that “fair isn’t always equal” but strongly argues against leaving a child out of the will!
In the Wealth Steward’s “The fee’s not the fee: What’s the real cost of investment management” Mark Barnicutt helps investors better understand what they’re paying for and how much to an adviser. The major categories are: 0.25%-0.75% for advice/counsel (goals, risk tolerance, asset allocation and portfolio implementation, financial planning, risk management, tax advice…), 0.3%-0.75% for investment management, 0.03%-0.05% for transaction costs, 0.1%-0.2% or more for pooled/special funds, and 0.1%-0.15% for custody fees. The grand total for a $5 Million investor ”would be “0.78%-1.9%, or an average of 1.34%”. (This is a great breakdown to try to understand the components and cost of advice; 1.34% on a $5M portfolio is $67,000 per year, so you better understand what you are actually getting for your fees. It could be worth every penny or it could be just a waste of money, or worse. Given the difficulty of beating the market, I would be reluctant to spend on active management i.e. the investment management and the pooled/special funds management categories; my objective would be to keep the total of those costs under 0.25%. Thanks to Ken Kivenko for recommending.)
In the Globe and Mail’s “Vancouver and Toronto property prices start to percolate again” Tara Perkins quotes BMO housing economist indicating that the Toronto and Vancouver housing markets which after having been “left for dead” a couple of years ago, are now accelerating again “over the past six months, prices in both of these markets have jumped more than 8 per cent annualized, and nobody will pretend that’s a rate sustainable for long from current levels”. Perkins has another article on Canadian house prices entitled “Why Fitch is sticking to its 20% Canadian home price overvaluation” in which Toronto and Vancouver overvaluations are estimated at 25%; these valuations are based on “sustainable home price model…where we compare changes in home prices historically to changes in five major macroeconomic indicators that we consider to drive the housing market, which are income, employment, interest rates, housing supply and population growth”.
Bloomberg’s “Secret path revealed for Chinese billions overseas” reports that “wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets including New York, Sydney and Vancouver despite their country’s currency restrictions…(this was accomplished via) a previously unannounced government program that enables individuals to transfer their yuan and convert it into dollars or other currencies overseas.” This is perceived as part of China’s push to internationalize the renminbi in preparation for convertibility. The transferors must show that they made the money legally, paid taxes on the funds and that they have a purchase agreement for property or emigration”. (Perhaps house price increases in Vancouver and Toronto are sustainable after all?!?)
In the Financial Post’s“Why most Canadians should be begging for a housing market correction, not fearing one”David Kaufman argues that “Only one of the three main groups of home-buyers — first-timers, young homeowners with growing families, and older homeowners thinking about downsizing — would suffer from a precipitous decline in home prices. The other two would benefit from such a decline.” (You guessed correctly…) “The empty nesters looking to downsize. They’re the ones who own that $1.3-million house and have been eyeing a chic little $650,000 condo in a trendy neighbourhood with lots of restaurants, cafes and movie theatres within walking distance.“
In Bloomberg’s “He’s the top U.S. mortgage salesman. His daughter isn’t buying it” Lorraine Woellert has an interesting story about today’s young adults’ perception about the virtues of home ownership. It’s about the CEO of Mortgage Bankers Association who “spent his career lauding the merits of homeownership” and his 27 year old daughter who knows that interest rates are low and owning a home can build wealth…(but) She also had a front-row seat to the worst real-estate slump since the Great Depression”. First time buyers’ share of market dropped from 37% (1984) to 27% (2014) even though their affordability index increased from 65 (1984) to 116 (2014). The millennials ““Like their grandparents who went through the depression, they’re apprehensive about overextending themselves.”
In the Palm Beach Post’s “Taxable value up for 86% of properties in Palm Beach County” Jennifer Sorentrue reports that 86% of the properties have higher taxable property values and unless the county/municipalities/school boards will reduce mil rates higher property taxes will be the result. The article notes that non-homesteaded properties can expect 10% increases in property taxes unless mil rates are reduced. (Welcome out-of-staters to Florida!) By the way if you are interested in the subject you can look at some more in-depth statistics of the impact of save-our-homes amendment in the Palm Beach County Property Appraiser’s 2013 Report
In the NYT’s “Saving for Bucket list that’s likely to evolve in years before retirement” Rob Lieber tackles the planning for leisure time in retirement, the likely changing definition of the activities one thinks might want to do in a decade (travel, golf, home renovations), the uncertainty of the cost of is to be actually done in retirement, retirees spending, how people define wealth, the fact that they don’t understand that ”subscription fees” (and sometimes adult children) are eating away at the affordability of other goals.
Pensions and Retirement Income
In the “what a great idea” category, in Benefit Canada’s“Why Canada needs just one pension regulator”Claude Marchessault recommends that Canada’s federal government become the single pension regulators (just as in the U.S.) replacing 11 current provincial ones and that this should be OSFI. He argues that this is necessary because the current fragmented system ”expensive, inefficient and serves neither employers nor plan members particularly well” (and I would add ineffective, as it lacks the capability to execute the required regulatory functions competently, as Nortel pension plan members found out, among others.)
In another demonstration of Canada’s systemically flawed private sector pension system, the SooToday’s “Retirees feel betrayed” reports that a “group of retired skilled labourers (or their widows)… represented by Sault-based United Association of Plumbers and Pipefitters Local 508…were informed only three months ago by pension trustees that their pension payments will decrease by a whopping 22.1 percent…(as a result of) amalgamation of the Sault’s Local 508 with Sudbury’s United Association of Plumbers and Pipefitters Local 800 “ because the latter was in better financial condition. (This sounds like a union run multi-employer type pension plan which doesn’t sound like it has any better regulatory oversight than single-employer ones. How sad is that for retirees in a developed country…but there are still lots of people running around arguing that all is well with Canada’s private sector pension system. Thanks to SL for recommending.)
In the NYT’s“This road work made possible by underfunding pensions” Josh Barro reports that the historically gasoline tax funded Federal Highway Trust Fund is running out of money and Congress given its sensitivity to the unpopularity of gas tax increases is planning a new approach. “If you change corporate pension funding rules to let companies set aside less money today to pay for future benefits, they will report higher taxable profits. And if they have higher taxable profits, they will pay more in taxes over the 10-year budget window that Congress uses to write laws. Those added taxes can be diverted to the Federal Highway Trust Fund.” Letting companies underfund pensions so they pay more taxes is a dumb idea…”
Things to Ponder
In the Financial Times’ “Fidelity loses ground to index trackers” Foley and Oakley report that the world’s two largest active fund managers Fidelity and Capital Group (American Funds) report the first 6 months of 2014 had asset inflows of $3.5B and $600M, while Vanguard had net inflow of $64B! Fidelity and Capital are “losing the battle from both ends… Investors are splitting their money between cheap index funds and smaller active managers whose more nimble size means they can place a smaller number of concentrated bets”. “Pimco suffered $32.3B in outflows in the first half”.
In the Financial Times’ “Insurers mine customers’ finance records to set premiums” Alistair Gray writes that insurers are “quietly trawling customers’ finances and other sources of “big data”, after proving that those who are careful with their cash have fewer car crashes”. There is strong correlation between responsible personal financial management and frequency of car insurance claims. “Companies are now accessing a wide range of information on everything from financial probity to shopping habits to determine the risk premium for individual customers”.
The Globe and Mail’s “Choosing the right place to retire overseas” is an excerpt from Haskins and Prescher’s new book “The International Living Guide to Retiring Overseas on a Budget: How to Live Well on $25,000 a Year”. The authors discuss how people’s tastes/needs change as they age shifting from beaches, sunshine and cost of living, to cost of living still important but quality medical care , city living with lots of activities and community also move up the list. They look at eight factors in their search for the ideal retirement destination: “affordability, health care, ease of transition, accessibility, community, housing prospects, climate, and things to do”, but they argue that community is the most important. They also consider “beach vs. mountain”, “small town vs. big city”, ease of getting there for you and family, and more. (If this is something you are considering, you might find the article/book of interest.)
In the Financial Times’ “US dollar clearing rules make gold the new green” John Dizard writes that “the world is finding ways to get along without currency after punitive actions of the US”. The alternative to the highly intrusive dollar (or Euro or Renminbi) system is more expensive. While “gold is the most expensive and least convenient of all of the monetary alternatives to the dollar… Yet its popularity as a medium of exchange for international transactions has been soaring”. So while more expensive, “it is less expensive than having dollar cash balances frozen indefinitely”.
In InvestmentNews’ “Fiduciary duty rule: No way out” Mark Schoeff writes that “With the outlook for passage of a uniform fiduciary duty now bleak, it’s astonishing to think the prospects for strengthening investment-advice rules to better protect investors looked so bright four years ago.” The article discusses some of the foot-dragging by industry players to sow fear, uncertainty and doubt about the dire consequences of introducing a fiduciary standard of care. (What other than the financial industry would have to gall to call themselves “advisers” but then refuse to abide by a best interest standard for the client?!?)
On the “something to think about” front, in the WSJ’s “Costly vertex drug is denied, and Medicaid patients sue” Joseph Walker reports that “Kalydeco, a $300,000-a-Year cystic fibrosis treatment, sparks legal battle in Arkansas and shows dilemma states face”. The article discusses: “the pressure expensive new drugs are putting on cash-strapped government insurance programs…And more of these types of expensive, niche drugs are on the way”, there are also debates about (cost?) effectiveness of the newer very expensive compared to existing/older protocols, how the prices for these drugs are set, the extent and process by which the drug manufacturer might provide these drugs for free to those who can’t afford them, and the timing when such drugs should be started. (The debate is just beginning; the subject is complex and may have effect on society’s moral and financial underpinnings: what’s a life worth, does every person have a right to the best available treatment independent of cost or ability to pay, who determines what’s best, and developers/inventors’ right to leverage “pain and suffering into huge financial gain”. Society’s willingness and ability to set unconstrained budgets for the care and healing of all individuals needing it, the wisdom of doing so and the morality of not; and the right of individuals or their families to demand that society pay for unlimited care. I imagine we are just scratching the surface of this topic.)
And, finally on a non-financial note, in the Globe and Mail’s “Living in retirement: Ten rules for slowing down and enjoying summer” Joyce Wayne writes that “Since my retirement one year ago, my daily routine has changed from working five days a week to working seven days a week. I’m not the only one.” (By the way, I resonate with this state of affairs.) She concludes with her new rules for combating her work ethic, including: set daily time limits to “work”, invite friends to dinner, “listen to Bach, Mozart and Copeland”, read and fall asleep on porch and remembering that “there is more to life than staying on top of everything”.