Wednesday, February 29, 2012

I distrust financial advisers.

An important add to this post: As I say in the following article, this piece was inspired by a conversation with a financial adviser who took offence at my take on Freedom 55. If you read his comments that follow my original post you will meet an adviser you can trust. He seems like a decent fellow. A good adviser will not always make you money, sometimes the investment world just isn't cooperating, but a good adviser can help you sleep and that is worth something.
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Some years ago I wrote a piece called: "Freedom Fund down 71 percent puts mattress up 345 percent." Although it is an old post, it continues to bring in hits. Recently I have been in a back and forth exchange over that old post with a reader going by the moniker "Too bad."

This person seems knowledgeable and they know the investment community jargon. I believe this person works in the investment business. Possibly, they are an adviser as they have indicated. I am writing this post partially as a reply to Too bad, and if TB wishes to comment, they can. I will not add my two cents worth. I will respect their position and let it stand unchallenged.

From June 30, 2009 London Life statement.
When I blogged about my Freedom 55 experience, I posted a chart which was part of an investment update from London Life. I am rerunning that chart today. As you can see, my investment in Freedom 55 tanked.(Three and half years later, it is still down by more than two thousand dollars.)

Too bad's first reaction was: "Yes, this guy thinks that he deposits $4196.71 over apparently 9 yrs and expects to retire a millionaire. Wow what a genius."

In a later exchange Too bad (TB) told me: " I could list many funds that over that same time have under-performed . . . some of them amongst the biggest funds in the industry . . . most not under the LL umbrella."

I know that TB sees this as a defence of  Freedom Fund. He seems to be saying, "Hey your investment didn't perform THAT badly, lots of funds do badly and bigger funds than yours." My mother called this "damning with faint praise."

When lots of funds are underperforming the mattress, something is wrong. When folk investing for their retirement lose big time, you can be sure the majority of fund managers made out just fine. TB likes to point out that some of my responses compared, as they say, apples and oranges. I say, O.K., let's take away the apple, let's examine the other fruit. I believe we'll find we have a lemon and not an orange. (In TB's defence he does point out that my original fund may well have been a lemon that even London Life acknowledged by dumping the fund from their offerings.) 

I decided to google: "how much value do advisers add to a portfolio." I learned from an article posted on the CBC News site that the Canadian Foundation for Advancement of Investor Rights, FAIR Canada, supports moves to have better performance information provided to investors.

"Many investors find after 10 years that they're no further ahead than when they started, but the financial adviser has generated large fees."Ermanno Pascutto, FAIR.

Ilana Singer, Deputy Director at FAIR Canada, notes governments and employers are gradually shifting the burden of providing for retirement onto the shoulders of individual Canadians, who must rely more and more on their own savings to get them through their retirement years. If your savings are with a financial adviser, it is more important than ever that your adviser understands the great responsibility placed on the shoulders of those providing financial advice.

One investor interviewed for a Globe and Mail article, written by Barrie McKenna, complained that “[advisers are] making money, whether we’re losing money or making money.”
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One expense I've faced in retirement is travel. I love touring in my Morgan.

If you take the value of my portfolio today and subtract its worth when I retired in Jan. 2009, you will find that I have about 45 percent more money today. This does not take into account the money removed each year in order to live.

I have been fairly open about my investments – some are conservative, the TD Monthly Income fund, some are risky but promise high yield – DRW, REM, lots are ETFs – AUSE, SDY, XIC, XRE and some are plain stock plays – CPG, IPL.UN, PWT. When I feel there is a dip in the market, I tend to buy. That was how I picked up my BNS, RY and ZUT and my latest purchase of PRQ.

I blogged about buying PRQ if it hit $10. Anyone who followed my hunch can now sell and will have made a quick ten percent profit after their trading fees are subtracted. Note: I share hunches; I don't give out investment advice.

A fellow I worked with at the newspaper uses an investment adviser. When the market wilted a few months ago, his adviser got him out of the market. Me? I scrambled to buy. One thing I did, was buy a hundred shares of RY at $45 for my Tax Free Savings Account.

My TFSA is up more than 20 percent in a few months. And the chap from work, I don't know if he got back into the market in time to benefit from the recovery. He hasn't told me.

22 comments:

  1. Too bad here:

    In regards to your comment.... that I meant that your investments did not perform that badly... that is taking my quote out of context... I actually said, that is bad!! and LL has fire that company. What I also said is that London life was not the only company to have funds that performed badly. You had posted your comments on a post that made it appear as if LL was the only company to perform so poorly... certainly not the case.

    When lots of funds are outperforming the mattress... is exactly the reason one needs a competent investment advisor to help them through the myriad of choices out there and to avoid the wrong choices. Those that can navigate those choices alone, good for them, just do not believe that is a large % of Canadians.

    Yes, comparing TDMI (which has fixed income -up to 40%) to your LL investment which is 100% equity( and likely very heavily weighted in one sector - I'll submit High Tech (at least initially) and a segregated fund) is in fact comparing two different things.

    It would be like saying my Porsche 911 can outperform your Minivan. Of course it can, but the Porsche is not meant to drive the whole family (and the dog) to Toronto for a weekend. That is the purpose of the minivan.

    TDMI and the LL investments are both investments, but significant different profiles... if you and/or your investment advisor assumed they were the same, that is a poor judgment call (or poor advice), but not a fair comparison....

    The Porsche and Minivan are both vehicles... but serve a very different purpose. I know this is extreme, but I think it gets the point across.

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  2. Advice from the investment advisor your buddy from work has...

    My initial thoughts on this were that yes, it appears that your buddy at work is getting poor advice from his advisor. Certainly I would agree with you when markets are down that is the time to invest. I think that helps with the whole asset allocation thing. If you say 50% Equity/ 50% Fixed Income.... and the markets are off, then yes you should be buying the markets. If you are 100% in the market how do you add to your market position without new $$?

    Then I thought it through a little longer, and decided I did not have enough information to determine whwther your buddy was getting abd advice.... did your buddy needs funds in the near term for a large purchase, did your buddy decide that he wanted to have lower risk in his account? Did he decide that he is retiring soon, did he recommend corporate bonds, High Yield Bonds, etc... I think you get the point, there is more to consider than just a quick answer.

    If on the other hand, your buddy is still many years away from retirement, is not looking at reducing risk, did not buy corporates or high yield bonds, this was not a very short term trade (for only a small % of his account), than perhaps he is getting poor advice... and should seek advice from someone else.

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  3. I bumped into my old friend today. He told me that he and his wife have changed advisers. Their retirement portfolio was not performing well, in their estimation. I believe they are now on their third adviser.

    Because I get a lot of dividends, when the market is down I reinvest my dividends rather than spending them on stuff like new tires for my Morgan (needed but I put this off for a year). I can trim quite a few thousand from my budget if I must. I try not to run yourself too close to the wire. Keep some wiggle room in one's plans, I say.

    My investments have wildly out-performed my friend's. Watching his portfolio thrash away like a fish out of water has been one of the reasons I lost confidence in advisers.

    You sound like an adviser. Your answers are making me believe that I should possibly be talking with you directly. You are an adviser,right? I have a serious heart problem and I need to leave the portfolio I control in such a state that my wife will be able to take it over with minimal problems.

    You might make me a believer. (I crunched some numbers after one of your last comments and I came away admitting that your approach last year would have been far superior to mine. Nice work.)

    If interested, drop me a line at:
    londondailyphoto1@gmail.com

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  4. P.S. On the Porsche and minivan analogy. If one needs a vehicle and leaves all to an adviser who gets them into a Porsche when they needed a van, you will know this is wrong but it will also be a costly mistake. You cannot leave all to an adviser. You've got to learn a little about the market yourself. No one knows you better than you. You must understand a little about the market and its volatility, and about bonds, and mutual funds and ETFs. Learn enough and you may feel confident getting by without an adviser. If you keep an adviser, you will be able to work with them to both your benefits. I gave the fellow from LL too much freedom.

    An interesting aside: I have an ETF which invests in PFICs. I was at a meeting where I sat next to a very highly paid investment adviser. I mentioned an ETF to him that is having problems because of PFICs in the ETF portfolio. His eyes glazed over. "I've never heard of PFICs," he told me. I was surprised. I expect chaps like him to live and breathe financial stuff and to have at least a passing knowledge of almost everything. He had no interest. He makes big bucks but I now think he does it mainly by selling his company's mutual funds. Big disappointment.

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  5. Found this blog while looking up critiques of Freedom55.
    Rockinon your last comment (Apr4 10AM) strikes close to home in some ways:
    I am a new Financial Security Adviser with Freedom 55 Financial, still undergoing training (with both LLQP and IFIC licenses only recently under my belt) and am learning tonnes of new things every-day. As I spend more time doing personal research related to investing and insurance I realize I have WAY more to learn, and am fearful for the day a prospect/client asks me something I cannot explain, or similar to your comment, a non-professional commenting on something I should be the expert on, and it going over my head.
    I guess all I can do for now is learn learn learn, be honest with prospects/clients, i.e. rely as much as possible on "know you client" and "know your product" (which Freedom55 treats as mantra's when training us new advisers, just so you know.)

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    1. No one knows everything. Just be straight with your future clients. All too often, I've had advisers try and snow me. Not good. A chap I talk with at one bank told me to dump Yellow Pages. This was, he confessed, his gut feeling and went against the bank's official position. His gut and my gut agreed and I got out. Loved his honesty and boldness. My Freedom 55 contact is a good man but more of a salesman that an adviser (even though he would argue that point.) I wish you luck as you get into the business.

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  6. I think you are a rare investor, I am not surprised most advisors would not be familiar with PFICs... my limited understanding of them is that they are for US citizens and/or bought through a US $ account.

    Keep in mind many advisors are generalist and the good ones... in my opinion, if they don't know the answer, have someone on their team that does. It is really tough to be an expert at everything, run a business, be prospecting, stay on top of tax changes, leading edge financial planning ideas, etc...

    I think it depends on the size of the firm, etc.. The more established firms either have specialist in-house or have strong affiliations with experts.

    I'd admit that I am more specialized in mutual funds and believe that active management outperms passive especially in difficult markets.

    I am impressed with the answer to the dividends.. and that you time them into the markets (I assume you keep them in cash in the meanwhile). I believe with your knowledge, you would have been pretty good if you had chosen a career in our industry.

    I am also sad to hear of the heart problem.

    I'd love to take you up on your offer to help you out, but I am out of town and likely have already burned bridges through that other site. I would suggest with your knowledge, you should have not have a hard time finding a quality advisor. I would suggest drafting your investment philosophy (for your wife and advisor) and help her understand the underlining beliefs you have. Interview a few advisors (while you are able) find one that reflects your beliefs and agrees with your philosophy (have them tell you their before you share yours)... and see. My guess is you'll find one in your city. I may suggest looking for someone that is an CFA (or has access to one)... this is no guarantee of performance, but they will be well informed about investments. That is the top designation in our industry for managing money.

    My investment philosophy is:

    1) Protection of Capital
    2) Yield
    3) Growth of Capital
    4) rebalance.

    Good luck and bets of luck with your health.

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  7. I thought about what you said and moved more of my money into cash. I am now 8 percent cash. I blogged on this and gave you credit for my move.

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  8. My fellow rocker... I am not looking for credit... if my advice helped.. I am happy for you.

    As for the young guy starting out... learn as much as you can... may I suggest following this blog... Rockinon knows his stuff.

    If Rockinon is up for it... I would ask him a few questions as a consumer to help you understand how an informed consumer makes his decisions... I think these may be questions you ask an informed investor when you work with you (but actually listen to his answers).


    1) What is your view on active vs passive management?
    (as an advisor understand the differences and why there is 2 thought patterns)

    2) What is your investment philosophy and feeling for risk?
    (You may need to help draw it out... find some questions that will help and you should also have one... and be honest with your clients, help them understand how you make investment decisions) If your philosophies are radically different, be honest and walk away.

    3) What are your views on Seg fund vs, mutual funds?

    ... explain them the extra costs/benefits (don't try and sell them segs and they find out later they are extremely expensive... tell them up front, explain their options and let them make the decision, and then document it for their IPS so they can reference back to it later.

    4) What is the expectations for returns/reviews, etc?
    (You better understand your cost structure as you do not want to promise service your business can't afford).

    Find out which are the best funds in the industry by asset class...

    When I built my organization, we set up an investment committee where we met quarterly to review our recommended portfolios. We had 7 people review (including a CFA (Wealth specialist -there is one in every region) to make sure our risk/return was appropriate for where we saw markets going, put each fund under the spotlight, reviewed any changes to management, compared them to top 3 in their category, etc...

    Continue your education. I am almost 20 yrs in the industry and still do over 100 hours per year.... I would encourage to spend 8 hours per week, every week for the first 5 years of your career learning (at least) Attend seminars (where the top advisors are), try and set up a mentoring program with a top advisor in your area... tell him you are willing to give him 25% of your FYC... trust me you'll make way more back from his knowledge...

    One guy that use to work for me... coined the phrase... What are the little hinges that swing the big doors... he meant what do I say to clients to get them to agree to go to the next step with me... for me it's all about the planning... I have to understand their situation before I am comfortable recommending anything, so I would ask a client... simple questions like when do you want to retire... when will you take your pension, CPP, how much will you get... most clients (in my experience) have no idea... so we help them understand how much they need, how much they already have, and what's the shortfall, and help them bridge that shortfall (almost always this includes a cash flow reorganization). You have to add value to their situation... that is what clients need/expect. Selling them a product that does not fit (because you did not do the analysis or ask the right question) is not going to make the relationship last

    Reinvest in your business and yourself... it will pay dividends eventually, I guarantee it. Invest at least 35% back into yourself/business.

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    1. I would also add we set benchmarks. We set benchmarks for overall net worth. We use a report from Cap Gemini on asset allocation (of overall net worth) of High Net Worth individuals to set the benchmark for our clients. Not all our clients would be considered high net worth, but we believe (perhaps a little imperialist) that they have had success building their net worth, perhaps we can learn from them.

      We analyze our client's overall position and give them feedback on how they "score" vs. the benchmark. Once the client understand the benchmark and agree it makes sense, we simply help them transition towards that benchmark. We report to them on their overall asset composition yearly and we adjust our position vs. the benchmark based on obvious trends... again we error on the side of caution. The benchmark usually is similar to our views.... I think the HNW understand (or their advisors do) how things work.

      As example... we believe overall worldwide interest rates (particularly in North America) will eventually trend up. If we look at interest rates over the last 25-30 years the trend has been to see reducing interest rates. We believe the next 25-30 years (exactly when is harder to predict) the trend will be to higher interest rates. What happens when interest rates rise... usually that is bad for real estate. We may suggest trimming our position on REIT, or for clients that their asset allocation is too heavily real estate based to trim their positions in a systematic way. Long term we are certainly more bullish on US real estate than Canadian for obvious reasons.

      We do a very deep analysis on every part of the overall recommending asset breakdown before making our recommendations. The categories are real estate, equity, fixed income, cash & alternative investments. We have a team that goes very deep on each category.... looking at a variety of product that deserve attention.

      On the fixed income side... we prefer (although we have not made that move just yet) shorter duration holdings to protect that asset class against devaluation due to interest rate hikes. (Here we sometimes like Life Insurance... just for context, as the IRR can be attractive and certainly is very attractive is we look at after tax returns vs... most of the groups)

      On equities, we always like dividend payers even if many believe the P/Es are high... that being said, we have lightly increased our positions on the US and growth stocks.

      We are informing our clients to aggressively pay down debts (in this very low interest rate environment), We have been (my mortgage is still variable) recommending those that has the cash flow to still be in variable mortgages and those with more long term concerns (usually older, are stretched financial) to get a 10 yr mortgage and lock in the rates. We instruct all our clients to pay down mortgages as of interest rates were at 6% (even if they have a 10 yr mortgage at 4%). We tell them, that will help pay down debt (at rates even below average over 30 yrs.) and offer protection should rates rise by their next renewal.

      We benchmark portfolio returns as well. We use a simple balanced fund.. the average balance fund in Canada. I tell prospects/clients this is if you just walked into your local bank... this is what they would offer you. We show how our recommendations have performed over the last 5-10 years. The client can see (and will continue to see) the added value we bring to their overall situation. I also explain to clients... that puts me in the hot seat.... because they will know how the "average" Canadian is doing... so we better outperform or why are they engaging us...

      TB

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    2. Once a client is redeeming part of their account (for extra cash flow, whether retirement or other) we help them understand conventional wisdom about 4-5% redemption rates... We also helps them understand where they are. Hopefully they will be redeeming less than 4% because their investments are performing well. As I mentioned we have an investment philosophy and seek out cash flows from investments.

      We also have a thorough understanding of our client's cash flow position, so we can properly advise them.

      I think you can see we take this job seriously... we think our client's want us to... we are their partner for life we hope (and beyond as our goal is to manage those client's asset for generation and generations). We believe that trust is earned over time!!

      Everything we do is to try and add value to our clientele. We also try and let them know we appreciate the contribution they make to the success of our organization. We show that by client appreciate events, taking their referrals seriously, conducting client seminars, delivering their financial plan is an easy to understand/make decisions format, treated them with the respect we would expect if we were their client, etc...

      We understand that the client is the most important relationship we have, not the companies we represent.

      TB

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  9. Four to five percent redemption rates sound very conservative and very by-the-book. If one's investments are performing very well, why not push the envelope and remove a little extra? One doesn't live forever and you can't take it with you and all that.

    When I retired at the start of 2009, I had 'X' in my RSP. Today, after withdrawals, I have 'X' times 1.4. My withdrawal rate, based on my original RSP is now about six percent.

    At retirement, I visited a number of investment advisers and I got info on how they would manage my wife and my money. At that time, it may not be that way now, the banks with which I talked would have put my money with Russell Investments. These advisers were all promising as much as seven and eight percent withdrawal rates depending upon the mutual funds chosen for me from the Russell financial basket. (There's a lot of return of my own principal in those figures.)

    I've done quite nicely, mostly without their help, and I've saved a bundle --- a bundle that I have been able to spend on myself to live.

    What I see advisers delivering, for the most part, is client peace of mind. Most folk are simply not comfortable being at the helm of a portfolio built up over a lifetime of saving.

    My wife once worked in a stock brokerage and knows a little about investing. But I can see her reaching out for an adviser if I should die first.

    I have everything set-up for easy downloading to Excel. I can track my portfolio with minimal work. I buy and sell my investments from home, by computer. I remove money to live with a quick phone call. As long as I have more today than I had when I started, I'm happy. I've tried to show my wife how easy it is and tell her that she can do it, too.

    But you, or another adviser, may well see her in your office seeking a hand to hold and guide her. She will love being told, "We understand that the client is the most important relationship we have, not the companies we represent."

    Do I see any use for an adviser at all? Yes, but only a paid by the hour involvement. Give me your point of view, give me your advice and then stand aside. Meet with me once a year, we'll talk for an hour or so, charge me a few hundred and let it go. Paying an adviser a fee equal to one percent or more of my portfolio is, in today's financial climate, not a fee I can easily afford.

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    1. I appreciate what you are saying... again I think you are the minority. You have a good understanding of how things work, and have had success... most canadians don't have the time, know how, or affinity to do what you do.

      Most good advisors (in my estimation) will limit their client base, some may have ad hoc clients, but the good ones have established clientele, so the odds of them taking a client that drives $300/yr. is unlikely. Keep in mind, we are business owners, and good business owners understand their revenue/expense model. $300 or whatever the hourly rate is... is not good use of a top advisor's time from a pure business standpoint.

      Based on your discussion and I believe your belief (and the results seem to show it), you do not need allot of help managing your portfolio, etc... Now I have no idea on the size of your account, etc... but advisors can help with way more than just investment performance. There is tax help, estate planning, etc.... with which many, many canadians need the help.

      Good financial advisors may be able to show some alternative investment options that you may not be aware of, or entertained in the past.

      TB

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    2. On the depletion rate thing. Again, we error on the side of caution. The general accepting rule is 4-5% without depleting your assets. Sure I can tell you 20 % per year to... but you know that would be part of your capital. Reminds me of BMO Monthly Income... I hear prospects tell me about this fund... again they just don't have the knowledge.... tell me it pays about 9% yield... the 10 yr. number on this fund is about 3%. You and I get that means about 6% of the yield is return of capital... but people buy the fund with the expectation they are getting 9% of their money.... we just help clients understand and set realistic goals.

      I am also an advisor that prefers to set my clients for success. Sure I could tell them 6% and hopefully we can deliver... but in we look at the odds of achieving 6% depletion rate or greater... I am not comfortable "guaranteeing" my clients those numbers. I would rather set them up for 4% and if we could back with 6%, their plan is sill viable. If I set them up for 6% and I come back with 4%.... not good for business (or the client). We look at probabilities. historical returns, where we are in equity markets, interest rates, etc... in determining our depletion rate, expected rate of returns, etc...

      As far as taking the money with you, etc... keep in mind the good advisors are typically working with higher income earners, or HNW clientele and most of those clients do not in fact want to deplete their assets (for various reasons... life expectancy, worked too hard to build them, etc..) and just live off the income they generate. Certainly when I am working with a client we have that discussion around depleting the assets, etc... most will say I don't want to deplete the investment... some want to leave a legacy either for their families and/or charities. Most success people want that feeling that they made a difference during their time on earth.

      If I quote you " As long as I have more today than I had when I started, I'm happy" does not sound like someone that is depleting his assets, and that likely will have assets live beyond you. Having an estate plan is perhaps no different than what you are trying to do with your spouse. It allows someone a little control from beyond the grave to make sure the assets you have worked so hard to keep and grow... do not get mis-used, and that your legacy continues.

      As far as hourly versus commission based... whatever... to me it makes no difference, we let them client's decide. We also offer our clients that have the means, to have us (me) on retainer... that way they can just call us on and ask any question they want. We can also manage their investments with minimal fees... I would do it for 0% except my dealer would make no money, so they have their minimums. Those that go on fee for service, we offer different service models based on needs... I suspect most do.

      I can state some examples of clients that feel free to ask us any financial question... most questions we are able to provide answers for immediately or we get them the answers, many times they are answers the CA or LLB would have charged for the answer so they have saved some money.
      They asks us these questions they likely would not have because they know they have us on retainer and we are their trusted advisor.

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  10. On the commission vs fees things (which I am indifferent on).. how many middle to low income canadians do you think would/can afford to pay fee for service for their financial advisor?

    I think if commissions were gone, they would be the biggest losers. These are likely the people that need financial planning/investment advice the most, and yet likely have the least appetite to actual pay for it... I think commissions allow advisors to give advice to a segment of the population that badly needs it, without direct $ outlay.

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    1. How much do fees consume of one's investments? According to an article I found in the Globe, about 2.4% is the average MER of a mutual fund in Canada. If you are retired with a $400,000 RSP, you could easily be paying $9600 a year in charges related just to the MER associated with your mutual funds! My personal feeling, backed up by some research, is that that money could be much better spent.

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    2. We are certainly fee conscience... I think you see that by the funds we have mentioned (TDMI, TD Income Advantage). Our balanced portfolio comes in at about 2% (all in). Even if you go to your bank and buy the average balanced fund from them, you are likely paying 1.5%... to have our expertise (not just investments knowledge) for $500/$100K, I would say it easily going to pay for itself.
      Our portfolios have significantly outperformed both the benchmarks (even at 0% fees) and the average fund in its category.

      Small example... had a client come in today with about $100K in RRSPs (us and bank about 50/50). He is a GIC client with the bank and in funds with us (yes we have outperformed the bank). We can increase his yield by adding about 1.5%/yr more to his GICS (Just a 1 yr gic). We do this by having him buy GICs from us rather than the bank. We also talked to him about his life insurance and did some calculations for him. He has about $100K in Cash value. The IRR on that cash value is over 5%. He had no idea. As well he is in a lower income bracket. Earning about $30,000/yr from his pension and wants to use about $9000/yr from his investments. He thought that he would take the funds from his life insurance first and then use his RRSPs. He was also contributing some to his RRSPs (even though he is retired). We informed him about IRR of his life insurance and help him realize that he would be far better off to take less from his RRSPs yearly and stop his RRSPs contribution and move that to his TFSA. We predicted it would take him 25 yrs to deplete his RRSPs at the rate he needed and only add about $1000/yr to his taxable income. An effective 20% taxation on his RRSPS. We also helped him understand that if he depleted his life insurance policy first and died with his RRSPS, likely about 50% of them would be sent to CRA. We anticipated that would mean a net estate of about $100K (and thus about $100K for CRA). We said if you do it our way, instead of sending CRA $100K (potentially) you would send them $15K (assuming he lives another 15 yrs) and your life insurance would have a death benefit of over $300K (Tax free paid out the next day).

      We also did the math on what he thought was the right strategy and it would have him deplete most of his assets within 20 yrs... our way he would have assets forever.

      His costs to do business with us... negative (As we can increase his returns on his GICS. We will have part (over 50%) of his portfolio in funds with Mers at or below 1.5%.
      In fact by telling him to stop his RRSPs contributions and deplete his RRSPs , he is actually a less "profitable" clients for me... but at the end of the day he is better off and that's the whole goal. It was actually in my better interest to allow him to move forward with his strategy.

      Truthfully the losers from our meetings are CRA (as they will get less from this client), the bank (as they will lose the GICs likely), and myself (as this client will be less profitable for my practice)... and the net winner is the client and his estate.

      I have not done the calculations on how much this change of strategy will make this client better off, by quickly he is saving about $85,000 that CRA will not get now and hi estate is worth likely $300K more (not to mention way less probate, lawyer fees, etc..). Not a bad result for a client where I can state that his costs are actually negative.

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    3. As well... forgot to mention because the client now understands that he will not deplete his assets in his lifetime and we can deplete his RRSPs in a 20% tax bracket... we would ask him what he would biggest dream be... Many of our clients say they want to help their grandkids (you may relate). In this case I would tell them... look you can take money from your RRSP (knowing you will never deplete the funds) at 20% and use it to help fund the grandkids post secondary education and the government will give your grandchild 20% on your contributions effectively allowing you to take money out of your RRSPS at a 0% tax rate. This would further add to the net savings of our strategy and we have done the simple math based on average income with someone with post secondary vs just high school diploma and can tell our clients that number (over the working lifetime) is $1M more. That is a significant legacy. It also may allow the grandchild's parents the ability to pay down debt quicker, help fund their retirement, etc... as they likely will need less funds to help fund their child's education... or the child will get out of school with less debt, etc...

      You can easily see that our strategy can add millions to an overall family situation just by looking at things a little differently... really that is all we do... and for this particular client... there was no "extra" cost.

      So this situation has the possibility of

      1) Increase the client net return
      2) Reducing his and his Estate's taxation
      3) Potentially leaving his kids $300K of estate
      4) Potentially funding a grandchild's education
      5) Potentially increase that grandchild's lifetime earnings by over $1M
      6) Decrease the parents of the grandchild debts quicker, help better fund retirement, reduce potential financial stress

      Of course the potential $1M more of lifetime earning can have a further multiplier for the family's future legacy many generations later.

      Again, all done at no cost.

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  11. The 4-5% redemption rate is yes by the book. Yes, it's conservative. Yes we try and earn more and hopefully we will. It is that whole Monte Carlo analysis you use... seems odd to me you use it when it works for your arguments, but forgot about the rest of the time. It also has to do with what you said about plan for the worst (when investing) which is conservative. I would rather set expectations that are achievable and surpass them, than plan for 9% and return way under and have my clients run out of funds in their lifetime.

    Using my depletion rate (has an extremely likelihood of being successful - Monte Carlo) and assuming the clients has outperformed... once we have what we feel a safe cushion, we will still deplete at 4-5% but the income will be larger as the funds we are managing are larger. This is similar to how London Life's Par fund smoothes returns. We will not just take 1 years gains and change the whole strategy, we will stay to the strategy because it is the right one. That is exactly why good advice is needed. The reason most people are not successful investors (as I am sure you know), is because they let their emotions and the noise around them affect their decisions and do not have the needed discipline to stay the course.

    As far as you are concerned and your 1% vs. hourly rate... if you fee you can do it on your own and only feel the need for short meetings... great! than you should only do what you are comfortable doing.

    Most canadians are not knowledgeable (or don't care to be) about finances. Most do not know probate costs, how to avoid them, why a testamentary trust (spousal or other) can help reduce OAS clawback, protect a more "naive" spouse, or protect a bloodline's legacy. I also believe (by extensive experience) most Canadians (I would guess 95% or more) have no concept of how much money they need to retire, what their lifestyle requirements are at retirement, how insurance products are priced, what type of insurance they require, most don't even realize that when they and their spouse die, RRSPS are fully taxable. I have even seen cases where people (second or third marriages) have their kids as beneficiaries to their pensions and their new spouse as beneficiaries to their life insurance. I have seen this more than once. These are just some of the easy reasons good advisors are well worth engaging with for the majority of Canadians. Those that have all the answers should likely not bother. Unfortunately most people don't even realize the value a good advisor can bring to the situation and never will. Their heirs will likely not even realize the difference we have made.

    Those that have taken our advice... like change your beneficiary on your pension to your new spouse (for the funds actually continue after your death) and have your new spouse pay the premiums on your life policy (even though your kids will be the beneficiaries)... will likely never realize that we could have saved their legacy hundreds of thousands of dollars (perhaps even millions) and we likely never got any compensation for that advice.

    Looking at that easy example. Say you are on $50,000 pension and die (you have named your kids as beneficiary on your pension) and your new spouse as beneficiary to $250,000 life insurance. Now you die and your spouse outlives you by 10 years.

    So the pension ends and your new spouse gets $250,000 (life inusurance). Kids properly say nothing... at worst they are pissed they get nothing and the new spouse gets $250K.

    Our solution... the spouse gets your pension (likely reduced by 50%) so $25,000 per year (ignore inflation for ease) and the kids get $250,000 immediately. We have just added a minimum of $250,000 to this situation (legacy) and likely much more happy kids.

    This is a very easy example of good advice. I could easily give you 100s of more easy example whereby I think GOOD advisors can add value.

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    Replies
    1. When my wife and I went seeking retirement income advice, we sat down with a fellow from one of the investment arms of one of Canada's big banks. He asked us how much we needed from our investments in order to balance our books in retirement. He started offering us a payout of about 5 percent but saw that, at the time, this would not have been enough. He then simply upped our payout to 7 percent. Dial in a little extra risk and voila, 7 percent. We walked. We didn't bite. His attitude seemed a little too cavalier. (P.S. I'm up an average in the double digits per year since retiring and that is after I have removed the funds needed to live. Luck, and that's what it is, is a wonderful thing. I find advisers are all too often ready to take personal credit for good luck but to ascribe losses to bad luck, to an impossible to foresee downturn in the market.)

      That said. I like your comment. From what I know about most pensions, a lot of what you say is accurate. You present the other side of the argument very clearly. Thank you.

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    2. You have obviously done well. Yes I agree with you... too good to be true is usually just that.

      I think most good advisors do not take any credit for the financial impact (and other impacts) their advice does provide. As my example above shows... the beneficiaries of the estate will likely never know why they ended up with money from their parent's estate. That is a potential $250K difference... I would say that is significant and a very easy example.

      We actually benchmark (As I mentioned) our portfolios to the average fund in Canada, so client can see for themselves the added value we bring (hopefully)

      Another example.. a client I am seeing today... called me after receiving his quarterly statement. He has about $700K with us and was off about $20K for the quarter. We took over his account last year... We explain to him that his account (60% Equity/40% FI) was about flat over the year. The showed him the difference between what he held last year, which was a fund with an MER about 3.5% and 100% equity which was off over 9% (net of fees) over the same period. That means he would have been off by almost $70K... I thought of asking him to send us a cheque for half that amount...

      He costs to deal with us over what he had previously. We saved him over $10K in management expenses year to year, plus increased his return. His costs negative by $10k per year.... again I could show you a ton more of examples of this.

      You have done well for yourself, but I would argue you are very much the exception and not the rule.

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  12. Here is a recent paper on withdrawal rates. Normally I would implement part of it if I thought it had some merit, but I think you'll find it a good read.

    http://corporate.morningstar.com/ib/documents/MethodologyDocuments/OptimalWithdrawlStrategyRetirementIncomePortfolios.pdf

    In case the link does not work the paper is called Optimal Withdrawal Strategy for Retirement Income Portfolios and written by Blanchett, Kowara and Chen.

    ReplyDelete