Friday, March 21, 2014

Short Takes: Financial Advisor Regulation, Tax Reporting of Web Site Income, and more

I had a full week of posts:

Different Ways of Comparing RRSPs to Other Types of Accounts

Dishwasher Commits Suicide

Reader Question: How to Protect against the Dropping Canadian Dollar

Malcolm Hamilton on Public-Service Pensions

Here are some short takes and some weekend reading:

Preet Banerjee interviews Dan Hallett in his latest podcast discussing The Financial Advisors Act of Ontario. My 1000-foot take on this act: it’s about weeding out unlicensed advisors and does nothing to address the systemic problem of the bulk of advisors hiding their fees from their clients and choosing ridiculously expensive products for their clients.

The Blunt Bean Counter explains that CRA now expects those who earn income from a web site, even if it is just advertising income, to fill out a T2125 form reporting these business activities. I’m still trying to get my tax software to handle this for me. I expect to get this to work, but if I end up having to file on paper, I’m pretty sure I’m done with advertising on my blog.

Potato has an interesting discussion on the regulation of financial advisors. I agree that the problems are systemic, but I’m not looking to the types of regulations that are designed to weed out a few bad apples. These things are fine as far as they go, but to handle the systemic problems requires a different approach. I think we need to cut off the funds flowing from funds to advisors. If advisors are performing a valuable service, their clients should be willing to pay them directly. The payment model doesn’t even have to change from the usual percentage of assets if clients are willing to pay that amount. A big benefit of this approach is that advisors would no longer have any incentive to recommend expensive funds. Remember that a 2.5% MER fund may only ship 1% of that to the advisor. The remaining 1.5% kept by the fund is a high cost with questionable benefit.

Big Cajun Man warns that you should read your home insurance renewal documents. He found a note in his renewal that his coverage for water damage is now capped at $15,000. This is too low to be considered real insurance. Although it would be painful, I wouldn’t be devastated if I had to pay $15,000 to repair some water damage. If the insurance company only paid for the amount above $15,000, that would be insurance.

Million Dollar Journey gives some insight into how Frugal Trader structures his personal finances with his corporation.


  1. Just remember what Chris Rock says about insurance, it's for IN CASE something happens... have a great weekend.

  2. Thanks Michael! I think we hit that point a bit on the podcast, but definitely need to make it as clear as you have here: burning down the embedded commission model will be an enormous first stride towards fixing the system. I'm eager to see what crops up in the UK as the industry stabilizes there...

  3. Studio Tax can handle the T2125 form.

    I don't use that form, but I just searched for it in Studio Tax and it is there ready to be filled out, so I assume it handles it.

    Studio Tax is FREE - but you can donate to them if you wish. I always give them at least $20 per year. It is more than worth it.

  4. " If advisors are performing a valuable service, their clients should be willing to pay them directly." Just curious how you reconcile this statement with you making money via advertising on your site? If you feel that should be the ONLY model, why not charge people directly for this site? When you go to a store and a salesperson helps you pick out a product do you pay them separately or assume their compensation is included in the sticker price?

    I agree that more transparency is better, but to assume there are no downsides to eliminating embedded compensation is foolish. One only needs to look to the UK to see what happened, almost a quarter of advisors left the industry and as much as 80% of the U.K. population no longer being able to access advice. How many advisors will want to work with small clients (<$10K) if they only get 1% (<$100) per year?

    1. @Anonymous: I assume you already know the answer to your question. The overhead involved in trying to collect a few pennies from each reader is far too high. Further, I'm not trying to fool anyone. People can tell which parts of my site are advertising and which parts are content. Most of the financial industry tries (successfully) to hide its fees from clients. If there were an explicit sticker showing clients what they are paying in terms they can understand, then the situation would be much better. However, I see no way that this will ever happen unless we cut off payments from funds to advisors.

      All change has a downside for someone. The question is whether there is a strong net upside. Why is a 1% fee per year the only possible model? Go ahead and charge whatever amount you need to make it worth your while. Just do it explicitly so that clients know what they're paying. If they don't want to pay, that's their choice. Hiding fees from clients takes away their opportunity to make a good choice.