Tuesday, December 27, 2016

How People Can Go Years without Saving a Dime

I encounter people who have saved very little money, if any, over many years in some cases and decades in others. When we look back over long periods of time, it seems inexplicable that a seemingly intelligent person could fail to save any meaningful amount for the future. But there is a simple explanation.

When we look to past failures to save for a long time, we look like fools. But when we look to the future, we see the rest of today, along with a magical time in the future when “I’m not so busy and everything isn’t crazy.” This makes it easy to not save today. After all, what difference can a single day make? The problem is that the last decade is made up of a few thousand single days.

Of course, this magical time in the future when things are calmer will never arrive. So, it’s easy to keep putting off things like saving money, improving your diet, and exercising.

In the end, the answer to the question “how can people fail to save any money for years?” is “they do it one day at a time.”

Thursday, December 22, 2016

Taxes and Cashing in Points

My employer has a recognition system based on points. Just like Air Miles and other reward systems, we get to cash in our points for various types of goods and services. What hadn’t occurred to me until recently was the tax implications.

When we cash in our points, the value of our rewards becomes a taxable benefit. So, for someone in a 50% marginal income tax bracket, getting a $100 reward actually costs $50 in additional income taxes. This is still a reasonably good deal, but the taxes have some implications.

Just because a reward costs the company $100 doesn’t necessarily mean it’s worth $100 to me. Fortunately, we have a wide range of reward choices, so it’s likely that I’ll be able to find things I actually want.

However, these points have expiry dates, and there is no guarantee the good selection of rewards will remain. Normally, if you have points that are soon to expire, you’d cash them in for something, even if that something isn’t exactly what you want. Not so in this case. If I have to pay $50 in taxes when I cash in my points, the reward had better be worth at least $50 to me. Otherwise, I’d be better off letting the points expire.

All this feels like looking a gift horse in the mouth. But taxes have a way of taking the fun out of just about anything.

Wednesday, December 21, 2016

Clients of Skilled Financial Advisors

Certified Financial Planner Carl Richards, a.k.a. The Sketch Guy, writes “In all my years of working with clients, I can only think of two people who wanted to retire in the traditional sense.” His clients find some sort of work (paid or unpaid) they want to do for the rest of their lives, or at least well after age 65. This surprised me because it is at odds with my own experience.

I sat down and wrote down the names of the first 20 people I could think of who have retired. All but four of them retired to a life of leisure, unlike Richards’ clients. Of the four, one does small contracting jobs on the side, one runs a small farm, one had to go back to work because his pension got chopped, and the last one is partnering with his son to get the son’s real estate career off the ground. Sixteen of them are enjoying their leisure.

This speaks to how rarefied the clients of some advisors are. Virtually all financial advisors prefer rich clients. The best advisors have minimums in the hundreds of thousands, but prefer clients with millions. I guess it’s not surprising that many with the drive to make millions like to keep going as they age.

I’m sure that Richards knows his clients well, but he goes off the rails when he says “The concept of retirement, as we understand it today, is completely outdated.” This may be true for his clients, but not for the unwashed masses. We can expect the nature of retirement to evolve over time, but I’m not holding my breath waiting for the day when almost all retirees continue to work some sort of job.

Monday, December 19, 2016

Toll Roads and Bridges

The mayors of five major cities across Canada have come together to call on the provinces to give them “increased revenue powers” to charge tolls on roads and bridges. The full text of open letter is reproduced below.

The mayors complain they don’t have the money necessary to build the infrastructure Canadians need. They say “city governments have been required to rely on property taxes alone to support our growing operating budgets, with dollars stretched thinner and thinner as we serve the growing needs of the public.” Apparently, property taxes are not enough.

I find it frustrating that the substantial property taxes I pay don’t seem to be enough. Over the past decade or two, city governments have added user fees to everything they can. So, I pay these fees in addition to my property taxes. The prospect of greatly “increased revenue powers” for the city isn’t a happy one for me. I believe it’s important to fix and grow infrastructure, but why can’t some of my property taxes fund these projects?

Here is a quote that definitely did not come from any of the 5 mayors:
“The problem is that so much of property taxes gets soaked up by huge city administrative work forces. It’s not that these people are lazy. Most of them work diligently at their jobs. There are just so many of them and their job functions often contribute little to serving city residents. We have a management culture of empire-building. When we try to do something about these problems, the effort is half-hearted and the unions don’t help. With so much of property taxes diverted into salaries, there just isn’t much left for infrastructure projects. If we can get these toll collections going, it will greatly reduce the financial pressure. We’ll be able fund a few projects and take some pressure off as city administrations inevitably keep growing.”

An open letter from Canadian Mayors calling for increased revenue powers
"You rarely have to ask permission to do the right thing.

But this is the position our cities find themselves in as we attempt to do right by our growing populations.

There is no doubt that Canadian cities are where economic and social policy hits the pavement.

We are the financial engines of the country. We are where young people are looking for jobs and families are raising their children.

Cities are where our kids go to universities and where researchers are battling the diseases our loved ones suffer.

The innovations and technologies developed in our cities are providing new tools to help Canadians live and compete in the modern economy, improving our approach to everything from agriculture to construction to financial services.

When cities do well, our entire country benefits.

But still, we find ourselves begging for control over our own finances.

For too long, city governments have been required to rely on property taxes alone to support our growing operating budgets, with dollars stretched thinner and thinner as we serve the growing needs of the public.

At the same time, our transit systems, roads and vital infrastructure are suffering from decades of underinvestment.

It's time for that to change.

Across the country, mayors stand ready to lead a new approach - championing reasonable measures to increase municipal revenues so we can make a positive difference in our residents' lives.

Great responsibilities require great powers, and Canadian cities are at the forefront of a growing housing crisis, overwhelmed transit systems, alarming fentanyl abuse, mental health issues and the growing divide between haves and have nots.

As the federal government introduces stimulus funding for transit and infrastructure, cities are also required to match these funds.

This is a good deal - a real partnership that can put cities on a strong footing. But we must still ask permission from provincial leaders to introduce new revenue measures to generate these dollars, requests that are always weighted against the particular political realities of a given moment in time.

As mayors of Canada's biggest cities we are ready to champion real solutions. In Toronto, road tolls would finance a long-overdue transit expansion and ease congestion that is choking the most populated region in the country.

In Metro Vancouver, a lack of new funding tools has put a strain on property taxes and delayed crucial transit investments for years - while residents deal with crammed buses and gridlocked commutes.

In, Edmonton and Calgary, a new fiscal framework would enable more predictable, stable funding to manage growth.

And in Ottawa, we have just completed a feasibility study that outlines the possible construction of a subterranean truck tunnel to eliminate dangerous and disruptive heavy truck traffic in Ottawa's downtown core.

These large infrastructure projects come at a great cost, and it is imperative that we collaborate with the provincial and federal governments to move forward with a solution that works for all.

Canadian cities should be able to control their own destiny: mayors and councilors are elected to serve their residents and create a bright future for our cities but the fiscal power to do so sits with other levels of government.

As a result, we're forced to do our job with one hand tied behind our backs.

Our request is simple: give us the tools to do the job and the accountability that goes with them and we'll build great cities for the benefit of all Canadians."

Naheed Nenshi, Mayor of the City of Calgary
Don Iveson, Mayor of the City of Edmonton
Jim Watson, Mayor of the City of Ottawa
John Tory, Mayor of the City of Toronto
Gregor Robertson, Mayor of the City of Vancouver

Friday, December 16, 2016

Short Takes: Investor Protection Wish List, Dividend Stock Location, and more

R.J. Weiss at The Ways to Wealth chose my post Aren't the Banks the Investing Experts as a top 100 post for 2016.  There are plenty of other good articles in each of his categories.

Here are my posts for the past two weeks:

How Life Can Mess Up the Best-Laid Financial Plans

Why Do We Focus on Advisor Cost?

Here are some short takes and some weekend reading:

FAIR Canada has a clear and concise “wish list of investor protection initiatives it would like to see implemented in the upcoming year.”

Dan Bortolotti has a smart take on whether to hold dividend stocks in a TFSA. In another article, Dan’s alter ego, the Canadian Couch Potato makes sense of Capital Gains Distributions from ETFs. Another contribution from Dan is his latest podcast exploring the difference between financial planning and investing.

Boomer and Echo discuss the dangers that await when you work with a financial advisor who doesn’t have to serve your best interests.

The Blunt Bean Counter explains how the U.S. estate tax affects Canadians.

Preet Banerjee explains compound growth in this video that is part of his “Learn About Investing” series.

Big Cajun Man isn’t a fan of financial advice from family.

Wednesday, December 14, 2016

Why Do We Focus on Advisor Cost?

Canadian investors have a problem. The mutual funds they own typically charge 2-2.5% of their savings (not just returns) each year. Over an investing lifetime, these hidden costs can consume as much as half of their savings, leaving them with half as much retirement income. You’d think that investor advocates would be calling for lower-fee mutual funds instead of just focusing on the part of the cost that goes to financial advisors. But there is method to this madness.

The second round of changes to the Client Relationship Model sets out rules, known as CRM2, mandating that reports to clients include, among other things, clear information about the dollar amount clients pay to their advisors. But there is no such requirement concerning the other fees that mutual funds quietly withdraw from investor savings.

This may seem like an oversight, but it is actually a targeted measure. To see why, we need to back up a little. A great many mutual funds, particularly the largest ones, do not seriously try to make market-beating returns. They are actually what are known as closet indexers. They own a portfolio of stocks and/or bonds that closely match stock and bond indexes.

You may wonder how such funds can expect to attract investors if they aren’t even trying to be the best. To begin with, they eliminate the risk of making bad investments and being among the worst mutual funds. Their other strategy is to pay financial advisors commissions and yearly trailing fees for steering clients into their mutual funds.

Some financial advisors resist the temptation to recommend mutual funds based on how much the advisor gets paid, but a great many don’t resist. So, this strategy works for mutual funds wishing to pump up their assets under management.

A disadvantage for these mutual funds is the lost revenue that flows to advisors. To compensate, the mutual funds set high Management Expense Ratios (MERs). The MER is money quietly removed from investor savings continuously. Closet indexers with high MERs are soaking their investors with high fees and are splitting the spoils with financial advisors.

If CRM2 can make advisor pay more visible, the hope is that their clients will start paying attention to these costs. If advisors are forced to limit themselves to reasonable fees, they won’t have any incentive to recommend poor mutual funds that happen to pay big commissions and trailing fees. So, if CRM2 has the desired effect, high-priced closet-indexing mutual funds will have trouble attracting investors.

Whether this strategy will work or not remains to be seen, but at least there is a rationale for shining a light on advisor costs when it is actually the total cost of investing that matters.

Monday, December 12, 2016

How Life Can Mess Up the Best-Laid Financial Plans

I frequently see people whose financial plans rest on a steady income. I’m not just talking about those living hand-to-mouth, never saving a dime. There are also the “spreadsheet planners” who have their financial lives all mapped out. They borrow large sums for a house or to invest, and rely on a steady income to keep up with the interest payments. As long as everything proceeds exactly as they planned, they’ll be multi-millionaires by the time they get close to retirement age.

I’d like to introduce these people to Heather Von St. James. Heather had a great life going but was hit with mesothelioma, a cancer caused by asbestos. Her story about the personal and financial costs she faced is definitely worth a read. (Disclaimer: I have no financial connection to Heather; I just found her story compelling.)

One takeaway from her story is that your income is not fully secure no matter how safe it seems. Heather’s story is a very specific case, but there are many different problems that can lead to long-term or permanent loss of income. In addition to health problems, you could face a situation where the type of work you do is no longer in demand. Workers in their thirties may find it hard to believe what they do could become irrelevant, but over a decade or more, many things are possible.

Heather points out that she was “under the care of my sister, who had taken three weeks off work to care for me while I recovered. All of her expenses came out of her pocket; she never got reimbursed for anything.” So, it’s not just your own health that is a potential concern. Your spouse, child, parent, or sibling could need your help. In Heather’s sister’s case, her loss of income was temporary. But, problems with a child’s health could easily force you to find different work with more flexible hours.

To the extent possible, we need financial plans that take into account the possibility of a reduced income. Taking on a huge debt is risky. You could be forced to sell your house or investments into a bear market.

There are a number of things you can do to reduce your risk. Being Canadian and having access to public health care is a good start. Having long-term disability insurance also helps. But there are still events that these protections won’t cover such as getting laid off and being unable to find new work at the same pay. The best thing to do to protect yourself is to build savings and limit your use of leverage. This means not borrowing based on the full size of your current income.

If you wish to learn more about mesothelioma, follow this link.

Friday, December 2, 2016

Short Takes: U.S. Fiduciary Rule, Jack Bogle, and more

I attended the Canadian Personal Finance Conference (CPFC16) recently. Here are my favourite quotes:

“A house is a forced spending plan as much as it’s a forced saving plan.” - Rob Carrick, columnist for The Globe and Mail on the CPFC Housing Panel

“You don’t borrow money from a bank, you borrow it from yourself.” - Preet Banerjee on learning how to hate debt again

Here are my posts for the past two weeks:

The Real Reason Why a Big Mortgage is a Bad Idea

Loyalty Points Battles

Here are some short takes and some weekend reading:

Brokers and insurance companies are desperate to preserve their right to deceive their clients. The latest effort to stop a fiduciary rule is an appeal to free speech.

Jack Bogle always gives a good interview, but this one is great. One gem concerns the path to real learning: “I glance at anything favorable to indexing; I pore over anything unfavorable. You don’t need people to tell you you’re right all the time. You need people to tell you that you’re wrong.” Another good quote is “Wall Street is a casino, that’s a fact.”

Justin Bender explains the catch behind commission-free trading of ETFs at National Bank Direct Brokerage. The result is that those who like to get new contributions working right away have to pay commissions.

Canadian Couch Potato has started a new podcast and the first episode is about DIY investing.

Potato announces a new web site for comparing robo-advisors (co-created by Sandi Martin). The focus is on comparing costs, but they take into account differences in other aspects of the robo-advisor offerings as well.

The Blunt Bean Counter sees a lot of estate planning mistakes, and he lists the top 10 here.

Boomer and Echo question whether reward points should be allowed to expire.

My Own Advisor interviews Ken Kivenko, a tireless advocate for individual investors. I admire Ken’s work, but after his description of his own investments, I’m not sure I agree when he says he is “very conservative.”

Big Cajun Man says debt is a four-letter word.