Contents: Stretching for return, ‘advice’: the secret tool for financial advisers, looking for right adviser, want advice: check out advisor first, hybrid advice: robo/human, Turnbull “Your portfolio is broken”: A book review, Morningstar: keys to retirement investing, you are the greatest threat to your credit, Canada’s home prices/sales power ahead again, London home prices off: are Toronto and Vancouver immune? UK pensioners get more flexibility and lower taxes, lawyers gorging on clients/victims- win or lose, delaying Social Security or CPP often wrong answer, born in the US and never lived/worked there-you better file your tax returns anyway or else, normal interest rate levels an investor’s dream or hallucination? outlet malls/stores: not a place to save but a place to get lower quality aspirational fashion.
Personal Finance and Investments
Jonathan Clements in WSJ’s “How reaching for return becomes like digging a hole” notes that in a market swoon some panic themselves into selling while others use investment strategies that puts them into a position where they have no choice but to sell at depressed prices. His examples include: margin loans to buy more shares, selling put options, using a portfolio concentrated in a few shares, buying leveraged stock funds, selling naked calls. You might also suffer severe losses if you are forced to sell stocks to meet your current expenses in the middle of depressed markets. Clements observes that since 1926 the S&P500 only 14% of the rolling 5-year periods and 5% of the rolling 10-year periods experienced losses, therefore he recommends that “money you plan to spend in the next five years should be out of stocks and in more conservative investments, like certificates of deposit and short-term bonds”.
In ETF.com’s “Secret tool for today’s financial advisors” Dave Nadig discusses the triple threat facing financial advisers: (1) at the low end it are robo-advisers and less-than rocket science requirements for DIYs to implement/rebalance/tax-loss harvest nearly free ETF based portfolios, (2) at the mid-tier “smart-beta products are taking away the at-least-perceived value added being provided by financial advisors who specialized in strategies like sector rotation or tactical asset allocation “, and (3) at the higher end of the market “third-party strategists like the ones regularly featured here in our ETF Strategist Corner are packaging their asset-class insights into model portfolio wrappers”. Various advisers are tackling these threats in assorted (and likely ineffective) ways, but Nadig believes that “The real value-add is focusing on the one thing you provide that no technology and no portfolio can provide: actual advice. True financial advisors do a lot more than just manage money: They actually shake hands with and get to know their clients. True financial advisors match up the realities of modern liabilities—health care, college tuition, retirement, charitable aspirations—with the ever-shifting nature of modern assets: uncertain real estate values, a fluid tax environment, the lack of traditional pensions, the plug-in/plug-out career path.” (How refreshing!)
In Bloomberg’s “You are not a piñata. Find a financial adviser who knows it” Ben Steverman discusses advisers who don’t work in the best interest of the clients. “Accounts run by advisers often do worse than self-managed accounts, researchers find. Advisers trigger too many trading fees and tend to steer clients toward higher-cost funds that pay them a commission. “Their advice is costly, generic and occasionally self-serving,” a forthcoming Journal of Finance paper concludes.” Steverman explores: trust, compensation, conflicts of interest, qualifications, personality and fiduciary responsibility as key aspects of choosing an adviser. Still some decide to manage their own money, even though they find it stressful, eats into their free time and they may not feel fully qualified, but they indicate that “at least I have my own best interests in mind.” On the same topic in the NYT’s “Before the advice, check out the adviser” Tara Siegel Bernard discusses the poor advice received by a couple who has done inadequate due diligence in selecting the advisor. They ended up with high cost (about4%/year) variable annuities and a 7% penalty should they need to access they funds on a short notice. This couple didn’t understand the meaning of fiduciary level of care and the implication of not having it. Often, even when an adviser might be required to act as a fiduciary when providing advice, “they do not have to act as fiduciaries if they are just selling an investment without including any advice”. The article also discusses: conflicts of interest, especially when person providing advice has his compensation driven specific employer sales targets, and the differences between Registered Investment Advisers and Brokers (or Registered Representatives).
Hybrid models using robo-adviser tools enhanced by human adviser’s touch are becoming available in the advice service delivery models as described in “How technology is killing of lame financial advice” and “Robo-adviser reaches out to traditional firms” . In the first of these Ben Steverman writes “While new “robo-advisers” pop up regularly, many are relying on flesh-and-blood advisers. They’re finding a human with a sophisticated computer system can be better at winning trust than an algorithm alone… Betterment is the most recent “robo-adviser” to offer a hybrid product. Its service will be opened up to the almost 3,000 investment advisers that are clients of $2-trillion company Fidelity Investments. They’ll pay 0.25 percent of assets if they choose to use Betterment-designed portfolios of exchange-traded funds.”
While we are on the subject of advice, you might be interested in reading my new blog post reviewing Chris Turnbull’s book entitled “Your Portfolio is broken” in which he looks at what’s wrong with the advice, investment management practices and business models in the Canadian context. The advice model tabled in this book is based on CFA Institute best practices then using a portfolio implemented using a passive/index based approach which is then delivered in a “portfolio manager” business wrapper with a fiduciary level of care. If you can access this advice model at an acceptable ‘all-in-cost’, it might be a reasonable solution for those needing advice.
Morningstar.com’s “Morningstar.com’s 5 Keys to retirement investing” lists their 5 keys to retirement investing as: (1) setting an appropriate asset allocation, (2) selecting dependable retirement investments, (3) managing your withdrawals, (4) accounting for Social Security and healthcare costs and (5) creating an estate planning baseline. I sampled some of the underlying articles of interest in the series and I found some to be interesting (sometimes the comments were even more interesting and instructive such as 50 Must-Know Statistics About Long-Term Care) or under the estate plan section a couple of articles discussing succession planning for your portfolio like Simplifying Your Portfolio for Your Spouse, Does Your Portfolio Need a ‘Succession Plan’? and How to Widow-Proof (or Widower-Proof) Your Portfolio.
In the WSJ’s “Longevity puzzle: A medical diagnosis complicates retirement planning” Liam Pleven writes that while a lot of people worry about running out of money, there are others who are worried about the risk of dying early after they have scrimped to prevent running out of money and thus missed out on experiences that they wanted to have. “How long you will live is the most important but unpredictable variable in your financial plan. Trying to make sure retirement is both solvent and satisfying means taking the whims of fate into account.” Pleven, looking at specific individuals who suddenly find out about their shortened life expectancy due to illness, and need to explore trade-offs on: Social Security, changes in spending, working or retiring earlier than planned, travel and in general finding a balance between security should one end up longer than the new information suggests and still living a full (even if shorter than originally expected) life.
In the NYT’s “The most serious threat when using credit: You” Ron Lieber writes that on the heal of the JPMorgan cyberattacks which compromised some of the personal information of millions of account holders, the rational response is to “Get a security freeze on your credit files and thwart the efforts of thieves trying to open new credit card accounts in your name. Use two-factor authentication systems at whatever sites offer them, in case someone gets their hands on your username and password. And please, do not click on any links in emails purporting to be from Chase or other card issuers; they might be from thieves phishing for additional personal information.” But he opines that the greatest threat is how we use credit, and some academic studies have shown that “in certain contexts, people were willing to pay up to twice as much for the same item when paying with a credit card instead of cash. This is known as the “credit card premium.” And things might get even worse as we head to smartphone based payments, as this will be another step more removed from cash. The best would be to just use cash, or get an electric jolt from out smartphone app just before we might be “parting with our hard-earned paper money”.
The September 2014 Canadian Teranet-National Bank House Price Index increased 0.4% (11-city composite) during the month of September slightly higher than the 0.1-0.2%/month increase during the previous six months, while the YoY increase was 5.4%. Some of the significant increases recorded during September MoM were Calgary +1.1%, Toronto +0.7% and Vancouver +0.9%, MoM decreases included Ottawa -1.1% and Montreal -0.9%. Some major YoY leaders were Calgary +9.5%, Toronto+ 7.4% and Vancouver +6.5%, while YoY laggards included Ottawa 0.1% and Montreal at +0.7%. But some worry that with oil prices falling by about 20% this could pull the rug from under the Calgary real estate prices as discussed in “Unsteady oil markets prompt fears Calgary housing will follow suit”.
And you find a further indication of the strength of Canadian housing according to Tara Perkin’s Globe and Mail article “Canadian home resales climb 10.6%, outpace expectations” writes that existing home sales were up 10.6% YoY in September, though seasonally adjusted MoM sales were off 1.4% , still significantly exceeding expectations of analysts. Based on the same raw data Reuters’ reports that “Canadian home sales fall for the first time in nine months” suggesting that this is “a sign that momentum in Canada’s hot housing market may finally be waning, the Canadian Real Estate Association said on Wednesday.” (Is this the old lies, damn lies and statistics syndrome?)
In the Financial Times’ “London house prices fall for the first time in three years” Sarah O’Connor reports that “The first time since January 2011…House prices have dropped in London for the first time in more than three years and are set to fall further this year, according to estate agents in the capital.” This is after “Prices have surged about 10 per cent in the past year and about twice that in London…” (I guess we’ll find out if Toronto and Vancouver are immune to such a phenomenon.)
Pensions and Retirement Income
Now here is some real pension reform that can help those who are near or in retirement. In the Financial Times’ “UK pensioners are to have more flexibility to access savings” Josephine Cumbo reports that until now individuals had the option to “take 25% of their private pension pot as a tax-free lump sum” but the new rules just introduced will allow “25% of each (subsequent) sum taken from a pension pot” to be also tax-free. (Pension reform in Canada? With the exception of the recently announced expanded-CPP-like Ontario pension changes which provide no improvement of substance to anyone within 10-years of retirement and certainly none to anyone already in retirement, there is little of substance that I can think of.)
In the Globe and Mail’s “Will the new PRPPs help Canadians save for retirement?” Preet Banerjee concludes that “With lower-cost options already available to individuals without the need for scale, and an apparent lack of distinguishing features over existing solutions, it’s hard to see PRPPs making a dent into its target market.” (Can pigs fly?)
Bert Hill, long-time Ottawa Citizen tech-business scene reporter sent me an interesting (Nortel related article) Economist article “The default choice” which describes NYC law firm Cleary Gottlieb as the “go-to law firm for governments in debt crises”; clients in the three decades included South Korea, Russia, Argentina. Cleary has also advised the French Bank BNP Paribas “on transactions with Iran, Sudan and Cuba, over which BNP later had to pay a $9 billion settlement” and they defended in New York Court British Bank National Westminster holding Hamas-linked charity account against claims by victims of terrorist attacks in Israel. According to the article, while the firm has a reputation which attracts powerful clients to it and top lawyers are earning about $3M/ year, recently had a string of losses in court. But the article also notes that you shouldn’t mourn for Cleary because it wins even when it loses. Had they won “legal work for them would probably have fallen off. Instead, their defeats pave the way for years of enforcement battles, and thus lots of juicy fees for its lawyers.” So where is the Nortel connection? It is described in the January 2013 Globe and Mail article by Jeff Gray entitled “From $100-e-mails to $300,000 for photocopies and meals, how Nortel racked up $755-million tab” (and that was to the end of 2012, since then it’s likely in the neighborhood of $1.5B). Guess who is representing Nortel in the bankruptcy proceedings and who billed it $217-million just until end of 2012 (no doubt about half a billion by now). (Law firms have little incentive to try to reach a compromise, so long as they can continue to charge the clients. Not to worry, Nortel’s Canadian pensioners and long-term disabled will pay the bills of Cleary and of other “fearless defenders of the law” from their pensions.)
By the way, unlike Nortel’s British and American pensioners most of who were made largely whole by various pension insurance funds run by the UK/US governments, Canadian pensioners took a 40% haircut. And if you want a dose of cognitive dissonance, here is a Mercer (the firm which did the actuarial work for the Nortel pension plan that ended up 40% under-funded ) actuary quoted in BenefitCanada’s “Canada’s retirement income system ranks high” where he indicates that “Canada’s retirement system continues to be one of the strongest retirement systems in the world…” much of it on the back of the low poverty rate among seniors in Canada primarily due to the OAS/GIS; in fact according to Fred Vettese in “The pivotal role of Pillar1” “85% of recent retirees in the lowest-income quintile saw their disposable income rise by at least 15% in retirement, and in a large number of those cases, it rose by 25% or more”. (I suspect many other Nortel pensioners might be surprised as well and might be wondering about the data and/or motives upon Canada’s retirement system would be accorded such a high rating. Many might even call such an assessment seriously flawed based on their actual experience.)
Coincidentally, this week a couple of articles discuss situations when it does not make sense to defer start of CPP and Social Security on both sides of the US/Canada border. David Aston’s MoneySense.ca article entitled “When it pays to take CPP early” “CPP calculations are based on averaging your contributions and “pensionable earnings” from age 18 until you start taking the benefit. But the government allows you to drop 17% of your lowest earning years—plus additional years for child-rearing or disability—from the calculation. That works out to eight years if you retire at 65. If you have used up all your drop-out years when you retire before 65 and don’t start CPP right away, then you’ll keep adding zero-earning years to the averaging calculation. In that situation, deferring CPP will bring your basic entitlement down.” Glenn Ruffenach in the WSJ’s “What you should know about Social Security” notes that “Social Security benefit is tied to your 35 years of highest earnings (with early-year figures adjusted for the average increase in wages over time). Typically, your earnings in your 50s and 60s are at their peak and will displace lower inflation-adjusted earnings (from, say, your 20s) when the Social Security Administration calculates your benefit. But if you stop working at, say, age 60, you could be stuck with some of those low-earning years in your benefit calculation. Or, if you don’t have 35 years of earnings, Social Security will use a zero for each year without earnings.”
Things to Ponder
In the Globe and Mail’s “Sweeping U.S. tax crackdown inflicts heavy collateral damage” Barrie Mckenna discusses the sweeping FATCA laws “aimed at finding unreported income by taking a peek at virtually every account held by U.S. citizens, anywhere in the world… Depending on the country, foreign financial institutions will now have to collect account information and remit it either directly to the U.S. Internal Revenue Service or to local tax authorities.” The US believes that there is about $70B in tax losses associated with offshore-tax evasion, but they expect to collect <$1B as a result of FATCA. While the article discusses scams associated with this new law, FATCA’s collateral damage is not just scams, it is also: costs to targeted financial institutions far beyond the expected benefits to the US, and violation of the sovereignty of targeted countries and privacy of residents (and perhaps even citizens) of those countries who often never lived or worked in the US and might only be US citizens by accident of birth location.
In the Financial Times’ “Normal interest rates a distant dream for investors” Russ Koesterich opines that “short-term rates will rise but a return to historic levels is a long way off”. US and UK long term government yields are at 2.5% and even if rates would rise to 3-3.5% they would still be” well below historic averages”. The central banks have limited ability to impact rates due to low-growth environment resulting from slower growth of workforce and population, aging workforce driving lower inflation. Furthermore aging population has a “preference for fixed income” which lowers supply and increases demand pushing rates further down. And finally institutional investor “are displaying a strong appetite for bonds”, following improvements in their funding status. The good news is that these continued low rates should lead to “higher corporate profit margins, which can help support stocks”.
And finally, in case you didn’t already know, in the Palm Beach Post’s “The secret you don’t know about outlet shopping” Clark Howard writes: “The percent of merchandise in today’s outlet stores that are irregulars or factory seconds is around just 1% to 5%. What’s there is stuff being specifically made for outlet stores. The goods are designed for outlets only using inferior stitching and subpar material. You’ll almost never find what’s being sold in the outlet store in the traditional retail store. It may look the same, but it’s not.” He calls outlet shopping “and experience”, “not a place to save”, “a place to get aspirational fashion”.