Saturday, January 18, 2020

Mutual Fund Costs not in the Spotlight

The high cost of having a financial advisor has been in the news lately. A recent example is Jonathan Chevreau’s discussion of the problems with Deferred Sales Charges (DSCs) and the future of financial advice. The banning of DSCs everywhere in Canada except Ontario is reshaping how financial advisors get paid. However, this discussion only covers a fraction of the costs mutual fund investors pay every year.

Mutual fund companies silently dip into Canadians’ mutual fund savings every year for a percentage called the Management Expense Ratio (MER). Too often, this is 2% or more. This may not sound like much, but when you lose 2% of everything you have saved every year, it adds up quickly. Over 25 years, about 40% of your money is gone.

Out of this MER, mutual fund companies pay financial advisors roughly 1% to choose their funds for investors. The remaining money from the MER goes to the fund company. But what do they do for their money?

Most of the largest mutual funds in Canada don’t even bother to try to pick good stocks. They are known as “closet indexers.” They just choose most of the stocks from a given index and collect their fees. With the biggest mutual funds, investors pay the fund company tens of millions of dollars and get little for their money. At least advisors do something for the tens of millions of dollars investors pay them.

Not all mutual fund companies are closet indexers. There are some that make a meaningful effort to choose good stocks and keep costs low. However, if your advisor hasn’t brought up how he or she gets paid, it’s likely you’re paying high costs to both your advisor and your mutual fund company.

Despite all the attention advisor fees are getting lately, this part of what investors pay in fees is somewhat useful. The money investors pay their mutual fund companies is usually a complete waste.

Friday, January 17, 2020

Short Takes: The World is Getting Better, and more

How your credit card company recovers from blocking your legitimate purchases matters:

Credit Card False Positives

Here are some short takes and some weekend reading:

Morgan Housel explains how the world keeps getting better for us even if it seems to be getting worse.

Retire Happy gives a nice summary of the high points of managing your financial life well.  He frames it in terms of New Year’s resolutions, but it’s really some easy-to-understand advice that applies any time. At one point, he throws out an interesting statistic: “What I find amazing is that 83% of those that file taxes have unused RRSP room”.  I have recently become part of this 83%. I used to use all my RRSP room each year, but I have no use for the room that arose from my last year working. I actually withdraw a little from my RRSP each year now to reduce lifetime income taxes.  So that last year of RRSP room sits unused. No doubt many retirees who used to use all their RRSP room contribute to the 83% figure.

Preet Banerjee explains how to save money when renewing term life insurance by undergoing a health check to requalify as healthy.  Keep in mind his warning about not cancelling the old policy until you qualify for a new cheaper policy.  If it turns out you’re very sick, the insurance company would like to have you cancel your existing policy (along with its guaranteed renewal) and then reject you for a new policy. In another video, Preet manages to connect the challenge of saving money for the future to gravity wells and the word “hyperbolic.”

Canadian Couch Potato goes through the 2019 investment returns of various assets classes as well as his couch potato portfolio returns.  Everything went up in 2019. This increased the safe monthly withdrawal amount for my portfolio and led me to sell some stocks to build my fixed income side to keep it at 5 years of available spending.  Fortunately, I have a spreadsheet to do the calculations and tell me exactly how much to sell.

Big Cajun Man is concerned that CRA is tightening the rules for getting the Disability Tax Credit.  It’s not clear if rules are changing or if CRA is changing enforcement of existing rules.

Boomer and Echo have a cautionary tale for those who feel like they missed the boat on weed stocks, cryptocurrencies, or any other high-flying “investment.”  Most things that goes up very quickly end up crashing, and most speculators get burnt.

Friday, January 10, 2020

Credit Card False Positives

It’s disconcerting when we find fraudulent charges on our credit cards.  A different type of problem is a “false positive,” which is when a legitimate charge is denied.  After having my credit card denied when trying to check into a hotel, I wished credit card companies would do more to help customers recover from these false positives.

It was my Tangerine credit card that wouldn’t allow the hotel charge.  Tangerine certainly could have done more to prevent this problem and to make it easier for me to recover from it.

I alerted Tangerine to the dates I’d be traveling and the country I’d be visiting.  I certainly could have given more detail, but all they wanted was “USA.” With more detail, maybe they could have seen that the hotel charge was legitimate.

The bigger problem was their response as I tried to fix the situation.  I called Tangerine customer service, but there was no option for “you denied a legitimate purchase.”  The closest I found was an option to update my travel plans over the phone.

Once I got a human on the phone and explained the problem, I was promptly forwarded to some sort of security center that had a canned message for office hours that didn’t include Saturday night, and then it hung up on me.  Nice. I guess that “customer service” agent gets credit for keeping the call with me short.

After a second try with Tangerine customer service, I got someone who was able to “clear my card.”  This seemed to solve the problem the next time I used the card, but through all this nonsense, I had checked into the hotel with a different credit card.  This story would have been much worse if I didn’t have a second card, or it hadn’t worked either, and I hadn’t lucked out with the second agent who bothered to help me. 

False positives must be a concern for credit card companies.  So, why don’t they do more to help customers recover from them?  When I call the phone number on my credit card, why isn’t there a prominent option for “you denied my change and I want to fix it”?  Even better would be if there was a way to do this online. Are other credit card companies more helpful than Tangerine at recovering from a denied charge?

Friday, January 3, 2020

Short Takes: Cheap Life Insurance, Financial Cleanup, and more

I reviewed Tim Geithner’s book defending his actions during the financial crisis:

Stress Test

Here are some short takes and some weekend reading:

Robb Engen explains how to get lots of inexpensive life insurance.

The Blunt Bean Counter explains the steps of a year-end financial clean up. 

Big Cajun Man shows how to guess someone’s salary from the date they stop paying CPP for the year.

Monday, December 23, 2019

Stress Test

It’s widely believed that the U.S. government bailed out the bankers who caused the financial crisis just over a decade ago and left the American people to suffer. President Obama’s secretary of the Treasury, Timothy F. Geithner, defends his team’s actions in his book Stress Test: Reflections on Financial Crises. What makes the book so believable are his admissions of mistakes and how uncertain they were about the correct actions to take throughout the crisis. However, he is very clear that protecting banks was a necessary evil to avoid cascading failures that would have led to meltdown in the greater economy. There was a very real possibility of a depression and massive unemployment. “Our only priority was limiting damage to ordinary Americans and people around the world.”

We’re familiar with the anger over bailing out the bankers who caused the problems in the first place, but less well known is the anger banks had for the government. “Conventional wisdom holds that we abandoned Main Street to protect Wall Street—except on Wall Street, where conventional wisdom holds that President Obama is a radical socialist consumed with hatred for moneymakers. The financial reform law that he wrote and pushed through a bitterly divided Congress after the crisis, the most sweeping overhaul of financial rules since the Depression, is widely viewed as too weak, except in the financial world, where it is described as an existential threat.”

Given the perception that bank bailouts cost taxpayers trillions of dollars, the truth is surprising. “In early 2009, the IMF estimated the U.S. government would end up spending nearly $2 trillion rescuing the financial system. In fact, the U.S. government’s crisis response not only prevented the collapse of the financial system and helped revive the broader economy, but as of the end of 2013 it was projected to generate about $166 billion in positive returns for taxpayers.”

The ratings agencies played an important role in creating the financial mess. “The AAA label ended up being very misleading. The ratings agencies were not exceedingly competent. Their ratings typically lagged cycles in finance, staying too optimistic too long. Since the issuers rather than the purchasers of securities paid them, they had some incentive to give generous ratings that kept issuers happy.”

The government was often criticized for not being tougher on the banks. However, being too tough on one bank would have caused more runs on other banks. By signaling that the government would back the banks, investors would be in less of a panic to get their money out. “A lot of firms that didn’t deserve saving still needed to be saved.”

“We provided extraordinary support to the financial system in general and some very poorly managed financial firms in particular. We didn’t do it to help their executives buy fancier mansions and sleeker jets. We did it because there was no other way to prevent a financial calamity from crushing the broader economy. When financial systems stop working, credit freezes, savings evaporate, and demand for goods and services disappears, which leads to layoffs and poverty and pain.”

As someone who spent much of his time in government trying to get out of politics, Geithner has little incentive to play politics with his account of the financial crisis. This is an important factor in making this book a good read. Warren Buffett says “Tim’s book will forever be the definitive work on what causes financial panics and what must be done to stem them when they occur.”