Hot Off the Web- Aug 4, 2014

Contents: Affordability of early retirement, insurance co victimizes annuitant, active funds flopped again, advisors need to justify fees, loving your mortgage, check brokerage statements for unauthorized transactions, Ontario’s stealth tax increases via tax bracket creep, US home price increases slow, Florida home prices still 36% below peak, Australia proposes next phase of pension reform, Ontario employers can no longer provide disability protection via self-insurance, feedback to DC plan members, index funds: capitalization or factor based just make sure that they are low cost and diversified, handling cognitively impaired clients, advisor commission bans are spreading, bonds risky or not?

Personal Finance and Investments

In the WSJ’s “Can you afford to retire early” Liz Moyer warns that with the stock market doing so well some people might be tempted to take a leap into early retirement, but there are things to factor in: more assets needed for extra years in retirement, consider impact of 20-25% drop in portfolio value, ability to control spending, healthcare coverage (for Americans before Medicare eligibility), reserves, etc.

In the Financial Times’ “Prudential forced to refund pension annuity” Josephine Cumbo reports that Prudential was involved in a case that a pension campaigner called  “quite frankly the worst I have come across in the 15 years I have been campaigning for reform of the annuity market” after it was discovered that not only was an annuity sold to a cancer patient but that Prudential have been informed of this during the so called “annuity cooling off period” and the policy should have been cancelled automatically…it wasn’t.

In’s “Active funds fail again & again” Larry Swedroe concludes that “the results clearly show there is no persistence of performance beyond the randomly expected. The only persistence here is the persistence of the evidence that past performance isn’t prologue when it comes to actively managed funds…On an after-tax basis, the results would be much worse because taxes are frequently the greatest expense for actively managed funds held in taxable accounts.”

FA-Mag’s “Advisors feel need to justify fees” reports that “Russell Investments has released its quarterly survey, the Financial Professional Outlook, which found that 74 percent of advisors want more resources to help communicate their value to clients, as many feel the need to justify their fees.” (Doesn’t everyone have to do this?)

In the WSJ’s “Nine reasons to love your mortgage” Jonathan Clements list reasons to like your mortgage such as: cheapest loan, access to cheap emergency funds, makes “inflation your friend”, “paying it off can drastically reduce your cost of living”, etc

In the WSJ’s “Check brokerage statements and online accounts for signs of fraud” Priya Anand recommends closer look at your monthly brokerage statement to detect fraud. Fraud perpetrated by hacking into your account may range from “unauthorized trades to manipulate stock prices” all the way to transferring funds from your account to their. The article recommendations include: “never log into an account from a public computer”, checking for unauthorized transactions in all statements, “strong passwords” and never clicking on email links claiming to be from financial institution even if they look real.

In the Financial Post’s “The toxic duo of taxes and inflation on high-net worth Canadians” Michael Nairne writes that the latest Ontario budget will “saddle affluent families with ever-growing tax burden. While the budget delivered hefty immediate tax increases for taxpayers in Ontario’s two new top tax brackets, the real damage over the coming years will be courtesy of the fact that these tax brackets will not be indexed for inflation.” Those relying on RRIFs will be hit especially hard hit as “the ever-increasing mandatory withdrawals will be subject to higher and higher tax rates. For some, bracket squeeze will be the coup de grâce to their retirement dreams.”


Real Estate

According to recently released May 2014  S&P/Case-Shiller Home Price Indices  home prices are increasing at a slower pace at 9.4% YoY vs. 10.9% the previous month. “Home prices rose at their slowest pace since February of last year,” Miami and Tampa are up YoY 13.2% and 10.2% respectively, and 1.2% and 1.8% MoM.

In the Palm Beach Post “Nearly six years for South Florida home values to hit pre-recession high” Kimberly miller reports that “South Florida home values remain 36 percent below their June 2006 peak, and won’t get back to that level until mid-2019, according to a new analysis from housing research firm Zillow… While prices rocketed skyward in 2012 and 2013, the increases have since slowed as investor interest wanes… But the area is still likely to see higher price gains than the nation.”

Pensions and Retirement Income

In the Financial Times’ “Australia’s $1.7T private pension system faces sweeping reforms” interim report recommendations drive to making Australia’s already superior private pension system to make it even better by lowering costs and adding innovation like some form of compulsory deferred annuitization. (Australia is heading in the right direction with recommendations for the next phase of pension reform: lower cost, passive vs. active investment approach, a focus on income in retirement vs. assets including possibly mandatory longevity insurance; in the meantime pension reform in Canada shows little or no action, the best the federal government could provide is the PRPP which so far has been received with little enthusiasm, and led to Ontario’s decision to proceed with what effectively is an expended CPP)

Blakes Bulletin reports that “Ontario Employers No Longer Permitted To Self-Insure Long-Term Disability Benefits” that “One of the changes in the 2014 Ontario budget – passed on July 24, 2014 – is to amend the Insurance Act (Ontario) to prohibit the provision of long-term disability benefits in Ontario unless those benefits are provided through an insured arrangement with a licensed insurer.” (Currently, many employers like Nortel did use self-insurance for long-term disability coverage, and if/when they become bankrupt the benefits evaporate at the same time, leading the long-term disabled to often end up on welfare.)

In the Globe and Mail’s ” Don’t count on a pension to stay afloat in retirement “ Rob Carrick reports that “new data on pension outcomes in retirement suggest some people could be disappointed with where they end up”. A Capital Accumulation income Tracker whose objective is to track the income replacement rate of a worker indicates that the replacement rate deteriorated from 72% in 2006 to 51% in 2014 for a particular set of assumptions. Such tools factor in the controllables (e.g. contribution rates) and the uncontrollables (e.g. interest rates, market returns), government pensions CPP/OAS, but excludes personal savings outside of CAPs. (The concept of continuous feedback to participants of DC plans is essential to insure that participants set an objective and can continuously monitor whether they are on track to achieve it or changes are required to hit target.)


Things to Ponder

In’s “Retort to ‘Problems with index funds’” Allan Roth discusses some differences between Vanguard’s capitalization weighted approach to indexing vs. DFA’s factor based approach. He concludes that “the debate between whether DFA or Vanguard is better is far less important than the need to keep a low-cost, diversified and disciplined portfolio”.

In Investment Executive’s “How to protect clients with cognitive impairment” Neil Gross reports that “The risk of developing dementia doubles every five years after age 60, with 20% of seniors over 80 being afflicted. Unfortunately that’s not the full picture. Another 30% suffer from what’s called cognitive impairment not dementia (CIND). In other words, fully half of people aged 80 or older have lost the capacity to make significant financial decisions.” This leads to challenges for both “the financial well-being of seniors” and for their advisors on how to proceed when they suspect cognitive impairment of a client. The article recommends “a requirement that every client must designate a specified person to be contacted in the event that the advisor has concerns about the client’s mental capacity”.

In the Financial Times’ “Riding the rollercoaster of commission-ban denial” John Kenchington, in reference to the spreading ban on advisers’ acceptance of commissions,  reports thatThe reason these bans are happening is simple: having people going around offering advice that clients think is impartial, but is in fact motivated by backhanders from the products being recommended, is totally unacceptable. “ The UK, Netherland and Australia have already banned commissions. (All their investors will be better off…even those with small portfolios…). On a related subject in  InvestmentNews’ “’Clients of the future’ will want advice but not how it’s delivered today” Matt Sirinides explains why advice will continue to be delivered even in the absence of commissions to low-net-worth-investors, because the model for delivering advice (to those under 45) is changing. “the continued commodification of basic investment advice will compete for the young’s attention via online advice… They’re after a wide array of services, such as cash-flow planning, financial plan development, and advice on retirement… also want more frequent contact with their adviser than their elders, but the good news for advisers is that they heavily favor social media, text messaging, email and video conferencing over phone and face-to-face meetings”.

And finally, in the Financial Times’ “A bargain basement index-linked loser” John Plender opines that a combination of “market distortions wrought by central bankers and by pension funds’ adoption of liability matching” are responsible for the current state of developed country government bonds; the latest manifestation of this is the negative real interest rate 2058 inflation linked UK  bond. Also while some are concerned that the current developed market demographics with fewer workers may lead to inflation, others argue that this is unlikely due the considerable slack in the labour market. So many suggest that negative real interest or not, these government bonds are a good deal, but Plender is not sure about outcomes so he only sees these as a form of risk mitigation elsewhere in the portfolio. However, John Dizard in “More stable banks, less stable markets” worries that with banks’ exit from trading (corporate bonds in particular), fixed income (not stocks) present the greater systemic risk. “Any sharp declines in non-government bonds are far more likely to lead to discontinuous markets, i.e., crashes.”


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