Hot Off the Web- February 9, 2015

Contents: Aids in adviser selection, advisers fail women, retiree debt levels deteriorating, prepping for health and LTC costs in retirement, Canada housing: Calgary on the precipice while Toronto motors on? downsizing? U.S. annuity sellers protecting their gravy train, Klarman: lessons from Buffett, Canadian household debt rings alarm bells, ETFs not the same as passive investing, smart beta just a marketing gimmick with factor implementation, ETF outperformance can be bad!?! authoritarian capitalism, “Still Alice” ending better than the frequent real life financial ruin and abuse often accompanying Alzheimer’s.

Personal Finance and Investments

In the WSJ’s “New financial adviser? Check out fees and conflicts” Peter Finch discusses considerations in selecting an advisor, including: fees/costs (fee-only, fee-based, transaction based, hybrid, full understanding of how the advisor is compensated), fiduciary level of care (or not), a link to a 25-point diagnostic questionnaire that you might use/modify and have prospective adviser complete,  as well as a link to SEC’s Investment Adviser Public Disclosure website where you can access the disclosure of the firm you are interested in by focusing on: material changes, fees and compensation, disciplinary information and other financial activities and affiliations. You should pay particular attention to inherent/potential conflicts of interest in business model and recommendations.

In the Globe and Mail’s “How the financial advice business fails women” Rob Carrick writes that “73% of women were unhappy with the service they got from the financial industry”.  Much of the problem has to do with “failure to communicate”. Carrick refers to advice from a report, on how women can establish better relationship with an adviser, which recommends among other things: clear understanding and articulating one’s goals, spending time to identify the right adviser and avoiding those who spend more time talking than listening. (Of course, both women and men will be better of if they get financially educated even if they end up using an adviser rather than being a DIY-investor which has the potential to lead to superior outcomes.)

In WSJ’s “High debt levels imperil retirees’ finances” Glenn Ruffenach reports that increasing numbers of Americans and their homes are at risk due the growing debt levels of the over 55 age group. The EBRI research report “Debt of the Elderly and Near Elderly, 1992-2013” indicates that for the over 55 group while “debt payments as a percentage of income” fell to 10% (2013) from 11.4% (2010), but the percentage of households headed by a person over 55 “that had financial liabilities increased to 65.4% in 2013 from 63.4% in 2010. In 1992, the level was 53.8%. What’s more, the percentage of these families with debt payments greater than 40% of income—a traditional signal of excessive liability—increased to 9.2% in 2013 from 8.5% in 2010… Most worrisome, fully 42% of households age 65 to 74 had housing debt in 2013, compared with just 18% in 1992. Among households age 75 and older, 20% had housing debt in 2013, up from 10% in 1992.”

In the Financial Post’s “‘We’re not prepared’: Health care shockers threaten your retirement” Melissa Leong writes that high among Canadians’ worries as they prepare for retirement are: healthcare and long-term care. Some numbers suggested in the article like $5,000/ year for out of pocket expenses for healthcare and $1,500-5,000/month in long-term care facilities are in the ballpark for these expenses, and explicitly accounting for them in a retirement plan would definitely make sense. But, the article is less than persuasive when it suggests insurance as the answer because while insurance costs were mentioned, the resulting coverage including caps and/or years of LTC which typically come with such policies, were not. (e.g. these were explored in some blog posts Individual Health Insurance Considerations for Canadians and Long-Term Care Insurance (LTCI) II- Musings on the Affordability, Need and Value: A (More) Quantitative View of 4-5 years ago on these topics. Remembering that for insurance product to make sense there are at least two requirements: (1) it must mitigate a very low probability but very high (financial) impact event (e.g. some sort of tail risk), and (2) the individual must have a real need for it (e.g. a relatively wealthy person may not need the insurance because s/he can handle the risk with existing resources.)

Real Estate

In the Financial Post’s “Calgary’s housing market under pressure as new listings, inventory soar” Garry Marr reports that while there has not as yet been a housing correction in Calgary, the stage is set for one given that “New listings jumped 37% from a year ago while the overall inventory was up 113.4% during the same period. “ Sales were off 39% from January 2014. The Globe and Mail’s “Panic hits Calgary’s luxury real estate as oil takes its toll” explores what it feels like at the coal face with $100,000 drop in asking prices in some luxury neighbourhoods but still no sales in the past 3 months.

Toronto housing prices continue 2015 on a different track than Calgary as reported by Tamsin McMahon in the Globe and Mail’s “Toronto’s housing market get off to a surging start in 2015” .  “Home sales in the Greater Toronto Area rose 6.1 per cent in January compared to a year earlier…Average prices jumped 4.9 per cent even as the region saw a spike in new listings, which rose 9.5 per cent compared to a year earlier.” But “Sales of detached and semi-detached houses in Toronto dropped more than 2 per cent, while sales of townhouses fell nearly 10 per cent. Only condo sales saw a yearly gain of 6 per cent.” In the usual economist-speak, the article notes the uncertainty associated with weakened demand for industrial space and drop in oil prices is being counterweighed by the effects of the lower Canadian dollar; the outcome is TBD.

In the Globe and Mail’s “When holding on to the family home makes sense” Gail Johnson explores the subject in the context of “downsizing” and lifestyle , and concludes that for many it makes sense to stay in the home as long as as possible: downsizing if you live and stay in Toronto may not release any home equity and the cost/SF in buying and owning a condo is higher, and lifestyle because home is ‘comfortable’. And answers to “three key retirement-related questions: Who will change your light bulbs? Who will you have lunch with? And how will you go to get ice cream? Combined, the queries address how people plan to meet basic day-to-day needs, maintain their social connections, and get around… Those questions are all metaphors for what the last 10 years of your life are going to be like and the challenges you’re going to face”.

Retirement Income and Pensions

In InvestmentNews’ “Why annuity sellers are fighting for your IRA” Stan Haithcock writes that instead of the annuity industry celebrating one of their products, QLAC (qualified longevity annuity contracts), having been selected as the only annuity structure for 401(k)s, the industry’s self-serving approach has driven it to ”fight to the death for indexed and variable annuity inclusion”, which the IRS and Treasury Department have “specifically excluded high commission and complex products like variable and indexed annuities”. (The annuity/insurance industry has also been fighting tooth and nail against having any fiduciary requirement imposed by the SEC on insurance salesmen should the same be required of financial advisors. Is the insurance industry looking out for the clients’ interests or trying to protect their annuity sales income?)

Things to Ponder

In the Financial Times’ “What I’ve learned from Warren Buffett” Seth Klarman lists among the 12 lessons he has learned from Buffett: “value investing works”, limit diversification, “risk is not the same as volatility”, prepare for the “unprecedented” as it happens regularly.

In the Globe and Mail’s “New alarm bells over household debt as Canada faces ‘downward spiral’” Tavia Grant writes that according to a new McKinsey report covering 47 countries, Canada is among 7 countries “with potential vulnerabilities in household debt that could lead to financial instability and a consumer spending slowdown” with debt-to-income ratio in excess of 160%.  “…rising real-estate prices and rising household debt, it can be a deadly mix…” The Bank of Canada’s rate cut is referred to as being “tempting to try to spur growth through credit. But it makes the need to monitor debt more urgent.” (Forecasting is difficult, especially about the future, but the problems won’t be solved by the 0.25% rate cut to 0.75%. Some might even argue that the “financial repression”  induced low interest rates are putting a significant downward pressure on the fast growing retiree population’s consumption, and that higher rather that lower interest rates are needed!?!)

In the Financial Times’ “’Robo-investing’ on the fruit and nut fringe” Stephen Foley writes that while “the rise of ETFs and the rise of passive investing are interrelated, they are not the same thing.”  Much of last year’s $241B net inflow into ETFs went into “broad index trackers” but more and more is also going into ETFs with very narrow focus including: narrow areas of equity market or ETFs offering “trading strategies in a bottle” including foreign markets, commodities, currency hedges “all with the aim of beating the market, not tracking it.” For example “Assets in strategic-beta ETFs hit $402bn and had inflows relative to assets of 19 per cent, compared with 13 per cent for non-strategic-beta ETFs in 2014”. John Bogle always said that “when it comes to trading, the greater the activity, the worse the returns.”

In’s “Inside the smart-beta hype” Larry Swedroe does another pass at trying to explain why smart beta  “is really nothing more than a marketing gimmick”. He explains the history: the 1-factor model (beta-riskier stock have higher expected (not guaranteed) returns) based CAPM (capital asset pricing model), followed by the Fama-French 3-factor (beta, small (vs. large) and value (vs. growth)). This is what smart beta is about; just higher exposure to factors than the cap-weighted market portfolio. Swedroe notes that “It’s important to understand that having more exposure to factors than the market does isn’t, in and of itself, either good or bad. There’s no one “right” portfolio. You should decide for yourself what the right portfolio is for your unique financial situation. And it should be based on your unique ability, willingness and need to take risk.”

In’s “Beware: outperformance can be bad” Howard Lee warns that an ETF which significantly outperforms its passive index might be an indication of “Hidden market crosscurrents and issues in portfolio management”. The source of the outperformance might be income from  lending of securities in large demand for shorting in anticipation of a drop in prices, or portfolio optimization relative to its index by taking advantage of being allowed to ‘sample’ the index rather than fully replicating it especially in illiquid markets. Lee’s bottom line is that “when there are significant performance deviations of an index fund from its underlying index, one should really dig under the hood to understand where these deviations are coming from.”

In a Financial Times opinion piece entitled “Capitalism has broken free of the shackles of democracy” Slavoj Zizek opines that the next century will be shaped by “authoritarian capitalism” (e.g. Singapore, China…) now that the link between democracy and capitalism has been broken. He further notes that “freedom is a weak foundation for capitalism in the west, for it is also a hollow one” when the hope of “long-term employment” evaporates in the name of flexible labor market and is replaced “perpetual opportunity to reinvent ourselves” or” state provision for retirement” is replaced by “freedom to plan our old age”. Bloomberg’s “The postmodern autocrat’s handbook” tackles a related topic of “mixed regimes that combine elements of autocracy and democracy, where central power over time becomes more diluted but individual freedoms are still limited”.

And finally, in NYT’s “In Alzheimer’s cases, financial ruin and abuse always lurking” Paul Sullivan discusses, in context of the new movie “Still Alice”, the needs/protection/preparation for individuals who get dementia exploring areas of: care, death with dignity, financial/physical abuse, medical treatment. Unlike the movie, real life endings are not always as good.


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