Hot Off the Web- Jul 28, 2014

Contents: Annuity vs. RRIF- can they even be compared? managing family portfolio after you’re gone, seniors natural fraud targets, how is your portfolio managed? work till 70 if you have little savings, Canada warned of coming US-style housing crash? Nortel bondholders to get $1B extra interest-final nail in Canadian pensioners’ coffin? UK drops mandatory annuitization but ensuring untainted and wise advice a challenge, watch out in pension de-risking, Detroit’s pensioners accept 4.5% less and no indexing, public US pensions reducing hedge fund allocation, Swedroe: unconvinced that supposed market inefficiencies can be exploited, publication of finance industry client complaints might spur their resolution, illiquidity is fourth-factor, Canadian inflation 2.4% YoY in June exceeding wage gains, Canadian life expectancy at birth up 25 years since 1921 but little improvement for ages >75, Carlos Slim:  working to age 70-75 at 3-day workweek betters quality-of-life/productivity and helps resolve longevity related retirement finance issues (and might even improve the economy).

Personal Finance and Investments

In the Globe and Mail’s “Which is better, a RRIF or an annuity? You may be surprised” Ian McGugan’s article’s title (might suggest to some that in general annuities are better than RRIFs, if you could compare them) is not fully representative of the content of his article (which actually suggests that this may be the case for ultraconservative couple who currently would only earn 2%/year on their assets, and even in that case it comes with caveats like this annuity payout is reduced to 50% should one of couple die.  (There appears to be more detail in article  “The truth about annuities” by the life insurance salesman referred to in the article.) (There are some issues to consider like: (1) comparing annuities (an insurance product) with RRIFs (investments wrapped into a tax-law prescribed withdrawal package) is not just an apples to oranges comparison, but more like apples to donkeys comparison, (2) an annuity is just a trade-off of longevity risk for inflation risk further aggravated by the (3) 50% payout to survivor which would likely leave the typically longer living wife with subsistence level income (e.g. after 15 years at 2.5% inflation one loses almost one-third purchasing power in addition to the 50% drop in income should the spouse die. The real question is whether this couple needs this annuity/insurance, how they would make that decision- which would drive one to consider other factors such as: other assets, other income, couple’s expenses, couple’s desire to leave an estate or to have adequate emergency reserves, etc, etc, etc)

In the Globe and Mail’s “Who will manage your family’s portfolio after you’re gone” Chris Turnbull tackles the critical issue of what happens when a spouse (who manages investments/finances) dies and the other (not versed in financial matters) is left to manage the finances by themselves. He argues that “Like updating your will, it’s what you do with your portfolio before you die that makes the difference.” He recommends consolidating now all the assets with a single firm and establishing a discretionary portfolio management arrangement for the couple, with the managers having fiduciary responsibility in this case and portfolio decisions made on the basis of an agreed Investment Policy Statement. (Clearly this is an issue in the case of many couples and the proposed solution might work for many, but some may still be uncomfortable to place all assets with one firm/adviser/manager, wouldn’t  know how to determine advisers’ competence/world-view/character, or how to select the adviser to whom assets are entrusted, and then knowing when to sit tight with IPS constraints vs. adapting to market and circumstance changes. This is definitely a tough problem.)

In the Globe and mail’s “Seniors and the dangers of investment fraud” Rob Carrick does a 2minute interview with CARP’s VP of Advocacy Susan Eng on the subject on investment fraud against seniors. Seniors are natural targets: they have accumulated assets for retirement, they are trusting and they want to believe when told that it’s possible to get high returns with low risk. But, there are no easy ways to identify the bad-apples.  Eng warns that if it sounds too good to be true, it probably is!

In the NYT article entitled “Understanding the philosophy behind your investment portfolio” Paul Sullivan asks the key question: “Do you understand what investment model your adviser is using and know if he or she has the skill to make good on what that approach promises?” and refers to a report which places advisers in one of four models distinct from the old model (adviser/firm places all assets in a “select family of mutual funds”): (1) portfolio managers who make all decisions, do financial planning, tax minimization, etc (2) passive allocators (no security selection, (3) third-party outsourcers placing assets in “more sophisticated funds whose goal is total return and not beating a benchmark” and (4) home office outsourcers (similar to (3) except that “head office” is where investment decisions are deferred to. (For my money, I’d go with a fiduciary adviser/manager who is a passive allocator based on an Investment Policy Statement developed specifically for the client.)

In WSJ’s “You’re  ready for retirement but your savings aren’t?”  Jonathan Clements recommends that those pre-retirees who have accumulated little in retirement saving, perhaps a modest DB pension plan, Social Security and possibly some home equity, should continue working at least to age 70 and don’t start taking social security benefits until then. (Great advice!)

Real Estate

In Maclean’s “Why Canada isn’t immune to US style housing crash” Tamsin McMahon writes that according to a new Morningstar report “a house price correction is ‘inevitable’” and  “Canadian home prices could fall 30 per cent in the next five years”. The report “debunks” myths for why Canada isn’t immune to a U.S. style housing crash: Canadians more cautious in assuming debt because there are no non-recourse mortgages (most U.S. states don’t either but recourse is of little value), mortgage deductibility in U.S. encourages more risk-taking, larger down-payments in Canada (Canadians have 55% equity in homes, about the same as US in 2005, and other myths. (Worth a read if you are looking to time a planned house sale.)

In a related story in the Globe and Mail’s “BMO’s Douglas Porter frets about Toronto’s housing market” Tara Perkins reports of concerns related to likely changes in the three drivers of the Toronto housing market: “extremely easy monetary policy”, demographics” and “foreign buying”.

Pensions and Retirement Income

In the Globe and Mail’s “Nortel, bondholders reach settlement on key dispute in bankruptcy case”  Richard Blackwell reports that Nortel and U.S. bondholders reached an agreement, still to be accepted by the court, “which will see U.S. bondholders collect up to $1-billion (U.S.) in interest payments on outstanding bonds, was reached Thursday, the day before the matter was set to go before a joint hearing in Toronto and Wilmington, Delaware.” If the WSJ version of the story “Nortel U.S., bondholders agree to $1.01 billion interest cap” is correct then this is a more nuanced agreement with Nortel U.S. only and not Nortel’s Canadian parent company. Clarification will no doubt be forthcoming. (If this “agreement” stands, and the court permits it to affect Canadian pensioners’ take from the remaining assets, it will be the final nail in coffin of Canadian pensioners. It would be an outrage.)

In the Economist Buttonwood’s “No right answer” he discusses the British government’s decision, with its termination of mandatory annuitization upon retirement, to offer free “advice service” to those entering retirement. “The advice, which will be paid for by a levy on the finance industry, will be from independent providers and will be offered over the phone, or via the internet, as well as face-to-face.” Buttonwood cautions about the complexity of doing this (properly)  and he notes that not a 15 minute phone call, because of the many factors that go into the decision (after all this is a non-trivial annuitize or not decision!) involving not just the individual’s personal circumstances and but also some assumptions about the Capital Market Expectations. He further notes that the financial industry will also be pushing complex products to retirees which have high fees (the type that are a triumph of hope over reality) which might trap retirees unless they are steered away by the advisers. Bottom line is that that with so much money at stake the financial industry (whether investment or insurance) may not be the best place to go for unbiased advice. What people will have to realize is that to beat the risk-free rates, which in effect annuities are, the will have to take more risk and deal with the bumps along the road. (As usual, this is a very thoughtful piece from Buttonwood.) The Financial Times’ “A brave new world for pensioners” notes that “The government has promised savers a half-hour interview with an independent retirement guide. This seems inadequate to the task… Getting rid of the compulsion to buy annuities does not banish mis-selling.” The article also notes that under the existing system of mandatory annuitization a combination of low interest rates, lack of competition, and poor regulatory oversight resulted in expensive annuity solutions. But under the new system removing the annuitization requirement still leaves a situation where “Mistakes are irreversible and can lead to years of hardship.”

In the Financial Times’ “Pensions and the risks of de-risking” Josephine Cumbo discusses how companies with final salary (DB-type) plans are being wooed by the financial industry with complex deals to offload the pension liabilities using two types of approaches: “buy-ins” (where pensioner continues to receive pension from employer but employer buys a longevity swap to offload longevity risk; this still exposes the employer to counterparty risk) and “buy-outs” (where the pension is actually transferred to an insurance company and “employer severs its links with scheme” (and pensioners’ relationship is now with an insurance company only). The “buy-outs” are the bigger risk to pensioners, as the consultants helping pension plan trustees to understand the “deal” are not focused on the best interest of pensioners but only the employer; the cheapest deal for the employer will likely lead to a weak insurance company and less protection for the pensioners. The risk to UK pensioners is mitigated to the extent that coverage is provided by the Pension Protection Fund and for annuities by Financial Services Compensation Scheme with somewhat different protections.

In the WSJ’s “Detroit pension holders approve city’s debt-cutting bankruptcy plan” Matthew Dolan reports that the bankrupt city of Detroit’s pensioners “would get a 4.5% pension cut and lose cost-of-living increases”.

In WSJ’s “Calpers pulls back from hedge funds” Dan Fitzpatrick reports that “Public pensions from California to Ohio are backing away from hedge funds because of concerns about high fees and lackluster returns.” The move from “plain vanilla investments” into hedge funds started about a decade ago as “part of a wider embrace of alternative investments, including private equity and real estate, as pension officials looked to diversify holdings in case more conventional investments faltered.”  Hedge fund reductions are not a retreat from all alternatives; for example as private equity is still an increasing proportion of the funds. According to a board member on a public fund quotes Warren Buffett as “I would not go with hedge funds—would prefer index funds.” (Duh …If interested in the topic you might also look at Larry Swedroe’s “Enough with the hedge fund hype”.  I wonder, noting that the reason for the retreat from hedge funds is high cost and low performance, it may not be long before we’ might see a retreat from private equity as well; costs are in the same ballpark, but (unlike with publicly traded securities, for private equity and real estate the asset valuation is somewhat fuzzy) so with private equity you don’t really know what your return is until you sell. The CPPIB is also very heavily invested in alternatives, and hopefully it will achieve its objectives.)

Things to Ponder

In’s “Debunking Grantham’s concerns” Larry Swedroe takes on value manager GMO’s Jeremy Grantham who has s been arguing that index funds are appropriate for unsophisticated investors but professionals can do better due to existing market inefficiencies. Swedroe suggests that based on available data there is little evidence indicating that Grantham can exploit the supposed inefficiencies.

In Bloomberg’s “Share your saga of financial frustration with all of America” Ben Steverman reports that the Consumer Financial Protection Bureau (CFPB) “logs more than 20,000 complaints a month in its Consumer Complaint Database…(and) the federal agency wants to publish Americans’ narratives of financial frustration online, allowing people to describe every Kafkaesque turn in disputes with the multi-billion-dollar firms that handle their money.” Industry insiders fear that “stories may tarnish some corporate reputations” but the author suggests that “these stories might spur companies to treat customers with more respect — and resolve complaints before they turn into mass entertainment”

In the Financial Times’ “Long-term returns boosted by illiquidity” John Authers writes that” the less liquid a stock, the better it will perform over time”.  Authers refers to a Roger Ibbotson article which reporting that liquidity needs to be added as a 4th element to value, size and momentum as factors which lead stocks to outperform the market. Liquidity here is measured as “turnover- the proportion of a stock’s market capitalization that changed hands in a given day”. The least liquid quartile of 3500 US stocks returned, between 1972 and 2011, 16.38% vs. 11.04% for “most heavily traded stocks”; in fact they also outperformed “small stocks and high-momentum stocks”. While the theory suggested that illiquidity comes with higher trading costs and is perceived as more risky, yet in 2008 the opposite happened; the higher transaction costs can be mitigated by trading less frequently.

In the Globe and Mail’s “Ouch: How inflation is outpacing wages” Michael Babad reports that Canadian inflation was 2.4% in June “Driven by higher food, shelter and transportation costs, that’s the fastest pace in 28 months, and up from May’s 2.3 per cent.” Wage increases over the past year were, less than inflation increase, at 1.9% (unionized employees did a little better at 2.2%. Meat was up 9.4%, fresh vegetables up 9.5% and gas pump prices were up 5.4% over the past year. Given that there is little wage-driven price increases, “the Bank of Canada believes many of the things fueling inflation are transitory”.

In the Financial Post’s “As life expectancy growth slows in Canada, are we hitting the ‘wall of death,’ lifespan limit?” Sarah Boesveld reports that according to a Statistics Canada study Canadians’ life expectancy at birth has increased 25 years in the past 90 years, with about half of the gains achieved by 1951 and improvements have been slowing. Infant mortality was reduced significantly “when penicillin and insulin were discovered and childhood immunization began”. Furthermore, life expectancy improvements were made by “fewer people dying before age 75, by unnatural causes or disease”. However “life expectancy has not greatly increased for those 75 and up, meaning that most progress has come through preventative medicine and public health campaigns that have greater impact earlier in life”. The article includes some interesting charts including one showing “Total number of expected years of life” at birth and at age 90 over the past 90 years;  life expectancy at birth increased from age 57 to 82, while at age 90 life expectancy is  only showing an increase from about 92 to 94.

In the Financial Times’ “Carlos Slim calls for three-day working week” Judde Webber reports that the Mexican telecom tycoon Carlos Slim advocates working to 70 or 75, a three day work week of 11 hours each, because he believes that this would improve quality of life and will “generate new entertainment activities and other ways of being occupied”. He also thinks this would “generate a healthier and more productive labour force, while tackling financial challenges linked to longevity”.



  1. Re the issue of “who will manage the portfolio when the family financial expert is gone”, my take for is this – – an ultra-simple portfolio that can be managed by anyone smart enough to manage a bank account. Forget Investment Policy statements, risk tolerance assessments. Building and managing an effective portfolio is simple. There is no crying need for a portfolio manager / investment advisor. The real need for folks is integrated financial advice for taxes, insurance, will and estate.

    1. You might be right that many investors who use an adviser, don’t necessarily need one. What I am concerned about is some will take on more risk than they can bear (and get hurt in the next market swoon) or that they’ll bail out of stocks near the next market bottom and lock in their losses (buy-high sell-low), and they might not know how to rebalance their portfolio. Some people just can’t or won’t deal with any risk, so they may need some hand-holding. What might be simple/obvious to someone financially inclined, might be less so to others. The are now many robo-adviser services (mostly in the US) which provide some upfront guidance to get the asset allocation into the right ball park and even do rebalancing, all for a very low cost.

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