Hot Off the Web- February 16, 2015

Contents: Financial literacy efforts a useless smokescreen? Clements: a happier financial life, bedrock personal finance rules, rules for your golden years, tax minimization in retirement, adviser to manage your RRSP? free portfolio management coming, auditing high value TFSAs? Canada housing up! renters the majority in big U.S. cities, Canada takes top 1-2-3 positions in global pension plans CEO compensation, 50% of Ontarians won’t need to save with ORPP, majority of Canadians already saving enough??? implications unknown of Canada 12th and US 19th in global retirement index, cognition declines but confidence stays strong while aging!?! new push by brokers to undermine DOL fiduciary push, debt and its morality through the ages.

Personal Finance and Investments

In’s “Stop Trying to Make Financial Literacy Happen” Helaine Olen reports that according to a recent study “Financial literacy doesn’t work…(and) studying financial literacy has a “negligible” impact on future behavior”. “The organizations most interested in promoting financial literacy are the ones that benefit the most from laws that assume consumers can be educated—and don’t need legal protection from corporate financial predators.”

In WSJ’s “How to lead a happier financial life” Jonathan Clements’  parting words for Sunday WSJ readers: eliminate/minimize commuting the biggest time waster, invest with humility, to minimize your fixed costs cheap housing a great start, spend money on experiences rather than things, “top financial goal: not working for money”. (Words of wisdom from Clements, for your life in general and financial life in particular; always thoughtful and useful. Looking forward to read more from him soon in the Saturday WSJ and elsewhere.)

In Brett Arends’ final Sunday WSJ column “Simple, bedrock rules on personal finance” words of wisdom for your life in general and financial life in particular. Always thoughtful and always useful. Hope to read more from you soon in WSJ or elsewhere. Words of wisdom for your life in general and financial life in particular. Always thoughtful and always useful. Hope to read more from you soon in WSJ or elsewhere. His list of rules includes: ignore forecasts, keep it simple, protect yourself from disaster (buy disability and term life insurance), don’t spend money showing off, prepare for a long life and many more.

In WSJ’s “Golden rules for your golden years” Anne Tergesen lists of 7-rules for your golden years also includes planning your life style. Some interesting links to assist with lifestyle planning included: for profit and non-profits Coming of Age and, and others.

In InvestmentNews’ “How to best minimize taxes during retirement” Mary Beth Franklin recommends combining “tax-efficient withdrawal and Social Security claiming strategies to improve retirement outcomes”. Traditionally the recommendation was to tap taxable accounts first, but this approach may increase overall tax burden. Instead for many tapping tax-deferred accounts first would reduce minimum required distributions later and thus lead to improved tax efficiency. Paying attention to asset ‘location’ (i.e. bonds in tax deferred and stocks in taxable accounts) also improve tax efficiency due to favorable tax treatment of dividends and capital gains. These approaches coupled with delayed start of Social Security can improve retirement outcomes.

In the Globe and Mail’s Diane Maley asks whether “Is it time to hire a pro to manage your RRSP?  Given that your portfolio of over half a million dollars, if you do need an adviser she explores available options: investment counsellor, discretionary portfolio manager, fee-for-service financial planner (many combine hourly rates for a portfolio review and an investment policy statement (IPS), and have an option to have the implementation (asset allocation/rebalancing) done based on total asset; e.g. Macdonald, Shymko charges $240-320 per hour, and 1.15% or lower depending on assets), or commission based salespeople, or asset managers who don’t even manage assets just farm them out to others. (My inclination, if I wouldn’t be a DIY investor, would be to hire a financial planner at an hourly rate to generate an IPS + an assets allocation, and the implement myself.)

In a WSJ blog entitled “In the future, portfolio management will be free” Mike Piper argues that with many robo-advisers (including Betterment, Wealthfront and even Vanguard) already are offering of 0.15%-0.3% annual fees for portfolio management (including rebalancing and tax-harvesting) and this will get even cheaper in the next decade. He also notes that in the future we’ll find many more financial advisers “offering actual financial planning services (tax planning, retirement planning, insurance planning, estate planning, etc.) rather than simply portfolio management, as it will become clear that portfolio management, while obviously important, is a low-value service”.

In the Globe and Mail’s “Keep your tax hands off my TFSA” Tim Cestnick makes a persuasive case why the current CRA push to audit with the intent to tax unusually large TFSAs on the basis that gains from frequent trading are business income rather than capital gains, and business income should be taxable even inside a TFSA, but Cestnick argues that the corollary would be to allow trading losses inside TFSAs to be deductible as business losses. (Of course the counter argument is that this was not the intent of the TFSA. I suspect that this rare problem of large TFSAs, if it is the result of trading public securities in public markets, will be self-correcting as with day-trading usually most traders will churn their winnings into losses; on the other hand if the ‘gains’ were a result dealing in private securities (or similar) with the intent of laundering gains from artificially low acquisition costs and/or artificially high selling prices, then it is a different story.)

Real Estate

Canada’s January 2015 Teranet-National Bank House Price Index was up 0.2% MoM after two monthly declines. Among the increasing cities were Vancouver (+1.2%) and Toronto (+0.5%). Prices dropped MoM  in Montreal (-1.6%), Ottawa (-1.1%) and Calgary (-0.7%). On A YoY basis the index was up (+4.7%) with Toronto up (+7.4%), Calgary (+7.1%) and Vancouver (+5.1%); Ottawa was essentially flat for the year at (+0.1%) while Montreal was down (-1.5%).

In WSJ’s “Renters are the majority in big U.S. cities” Kusisto and Hudson report that “renters made up the majority of the population in cities at the core of nine of the nation’s 11 largest metro areas in 2013, a sharp change from 2006, when renters were the majority in just five of those cities”. As demand for rental units grows much faster than supply then “vacancy rates will fall, rents will rise, and more renters will struggle with the costs of housing” In New York and Miami the rental population share has increased from about 60% (2006) to 65% (2013); similarly in Boston, L.A. and San Francisco also saw a 5-percentage point increase over that periods to about 60%. Houston, Washington, Dallas and Chicago are also cities with majority rental populations.

Retirement Income and Pensions

In the Financial Times’ “Listed: Highest-paid pension fund CEOs” Madison Marriage reports Canada’s pension funds took top 3 spots in 2013, at least on the compensation scale, among 14 funds globally looked at by the Financial Times. The top 3 were Jim Leach at $7.36M (Ontario Teachers), Mark Weisman at $3.1M (CPPIB) and Ron Mock at $2.5M (Ontario Teachers). The next 11 fund leaders’ compensation ranged from $360K to $1.04M. Some suggest that as pension managers benefit from this high pay culture, pensions cannot be relied on to contain CEO compensation for the companies they invest in. Ontario Teachers defended the high CEO pay arguing that you must pay top quartile to get top quartile performance; though for 2013, at least, Ontario Teachers’ performance was 13th out of 14 on the list.

In MoneySense’s “Half of Ontarians may not have to save for retirement” Stefania di Verdi quotes Fred Vettese  that Ontario’s new pension plan is so generous that about half of the province’s “residents won’t have to save for retirement after the new ORPP is phased in”. The cumulative income from the combination of ORPP/CPP/OAS/GIS “will be enough to live on for most Ontarian earning less than $50,000, given a 60% replacement rate suggested by some as being adequate for retirement. However those earning above $50,000, who are now “facing the real savings crisis in the first place” they will have to live with a more significant “drop in their disposable income in retirement”. (An easy way to alleviate the problem mentioned, as well as the transitional phase-in problem, is by allowing voluntary increased or lump-sum contributions to ORPP and/or CPP.)

But Janet McFarland in the Globe and Mail’s “Majority of Canadians saving enough for retirement, survey says” reports that according to a McKinsey & Co survey “many people are worrying needlessly because they don’t know how much income they’ll have when they retire or don’t know how much they will likely spend.” But mid-to-high-income Canadians without (DB) pension plans have the greatest savings gap. “The survey assumes most people will spend (?) 65% as much in retirement as they did preretirement.” (This was a difficult to understand article, and I am not sure what is included/excluded but at needs defined as 65% of pre-retirement ‘spending’, I would be very cautious with the conclusions. In fact I would be interested in knowing who sponsored the study?)

And, speaking of incomprehensible surveys. in Bloomberg’s “U.S. retirement security isn’t getting any better” Suzanne Wooley reports that the just released 2015 Natixis Global Retirement Security Index, Switzerland is # 1, Canada is # 12 and USA is #19. The article’s comment on Canada’s #12 place is “Health is Canada’s lowest category ranking, at No. 31. Its highest ranking is for finances in retirement, at No. 11.” (I won’t even attempt to try to understand, and certainly would have difficulty to explain this.)


Things to Ponder

In a Boston College Center for Retirement Research report entitled “How does aging affect financial decision making?” Gamble, Boyle, Yu and Bennett, based on a study of 377 individuals (78% female) of average age 83, concludes that “The findings confirm that declining cognition, a common occurrence among individuals in their 80s, is associated with a significant decline in financial literacy. The study also finds that large declines in cognition and financial literacy have little effect on an elderly individual’s confidence in their financial knowledge, and essentially no effect on their confidence in managing their finances.” (Not a pretty picture. Thanks to K. Kivenko for recommending.)

In InvestmentNews’ “DOL fiduciary duty stalls again as brokerage industry makes last-minute push against it” Mark Schoeff Jr. discusses the stalling tactics used by the financial industry. First (for the past three years) the focus was to “prevent a revised version from being floated”, now that this has failed the industry wants to slow it down hopefully to run out the Obama term. The industry no doubt feels that it can only benefit from not finalizing it during this administration. (What a surprise!?!)

And finally, in the Economist’s “Debt, morality and the cycle” the Buttonwood column looks at the history of debt, how society’s attitude evolved about it throughput the ages, and what the future might hold. “The extraordinary financial situation that currently exists, with negative rates on cash and bonds, QE and all the rest, is a sign of a crisis slowly unfolding. A new system will emerge at the end of it, I am sure, although whether this will be the result of deflation and outright default or inflation and the real erosion of capital is hard to tell. At the moment, it looks like the former—and Greece is only the starting point.”


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