Friday, September 27, 2019

Short Takes: Canadian vs. U.S. ETFs, Real Estate, and more

Here are my posts for the past two weeks:

More Buyers than Sellers

STANDUP to the Financial Services Industry

Here are some short takes and some weekend reading:

Justin Bender looks at when it makes sense to own the all-in-one ETF VEQT and when it makes sense to hold two separate ETFs VCN and VT. I answered a similar question in a recent post, but was considering replacing VEQT with all 4 of its components.

Preet Banerjee has Ben Rabidoux back on his Mostly Money podcast for an update on Canadian real estate.

Big Cajun Man looks at the financial part of a marriage preparation course.

Thursday, September 19, 2019

STANDUP to the Financial Services Industry

John J. De Goey doesn’t mince words in his book STANDUP to the Financial Services Industry. He says you should be “protecting yourself from well-intentioned but oblivious advisors.” In addition to pointing out the current problems with financial advice, he paints a picture of what it should be. He also offers an extensive list of questions to ask your financial advisor. Although parts of the book appear hastily written, the main message comes through loud and clear: we pay too much for advice that is often based on “facts” that have been proven untrue.

Critics of financial advisors often paint them as villains, but De Goey says “Advisors might be better seen as unwitting accomplice intermediaries between some sophisticated corporations and trusting Canadian consumers.” So, your advisor may not be a bad person, but he or she works for people who know Canadians are getting a raw deal.

While there is reasonable debate about the value of financial advice, there is little doubt that mutual fund managers add far less value than they cost. The mutual fund “manufacturers pretend to reliably add value, and the advisors pretend to be able to reliably identify the ones who do so.”

De Goey says that advisors who want to do a better job for their clients by using cheaper products get gagged. IIROC Rule 29.7 (1) f) says that advisors can’t publish material that “is detrimental to the interests of the public, the Corporation or its Dealer Members.” This rule is applied liberally to suppress publications that criticise expensive mutual funds.

The author sees parallels between the financial services industry and the tobacco industry decades ago. The message that tobacco is harmful was suppressed in ways similar to the way that criticism of expensive investments is suppressed today.

“Currently, many advisors and clients presume that high product cost is immaterial,” and “most clients don’t understand how or how much advisors are paid.”

Advisors cling to easily refuted narratives like “Embedded compensation doesn’t cause advisor bias,” “active management consistently adds value,” “I’m a good fund picker,” and “I’m a good market timer.” This makes them “card-carrying and founding members of the fictional Society of Cognitive Dissonance.”

There were quite a few parts of the book that were harder to parse than they should be. I’ll point out three mistakes that aren’t too hard to fix, but a few other parts were harder to follow.

“It is not four times as much work to deal with one $1 million client as it is to deal with four clients with $250,000 each.” One instance of “four” needs to go.

“Someone ought to run a test to see what advisors would recommend if they had to choose between active mutual funds that pay an embedded commission and passive funds that do not.” This is the status quo. He meant to test a new scenario where the commissions are attached to the passive products. The purpose was to show that although many advisors express a belief in active management, they actually just follow commissions.

“What percent of actively managed funds survive to celebrate a 10-year anniversary?” “See if you can get your advisor to hazard a guess. Most will say something like 15% or 20%. The actual number is closer to 40%.” This initial question should be what fraction of funds don’t make it to 10 years.

In one section, De Goey gives some quotes he’s heard from advisors. One quote is “They don’t have any debt except for a mortgage and some student loans.” His amusing reply: “I’m a vegan except for bacon-wrapped steak.”

In conclusion, this book gives a valuable insider view of what’s wrong in the financial services industry. I recommend it to anyone who has a financial advisor, and especially to financial advisors themselves.

Monday, September 16, 2019

More Buyers than Sellers

We often hear that stock prices rise because there are more buyers than sellers. Critics like to mock this way of thinking by saying that in every trade, there is a buyer and a seller, so there can never be more buyers than sellers. I think this is just being argumentative.

At a given moment there can be more traders interested in buying a stock than selling that stock. This causes the price to rise so that more traders are enticed to sell and some potential traders are discouraged from buying. This continues until buying and selling interest gets back into balance.

So, we can give the full long-winded explanation, or we can just say “buyers outnumbered sellers.” I can understand if some people don’t like the short form, but that doesn’t make the people who use it wrong. Critics can accuse them of being unclear, but calling them wrong is just being argumentative.

If we want to be even more precise, we shouldn’t be counting just buyers and sellers, but weighting them by the number of shares they trade. This all works in reverse when stock prices drop because “sellers outnumber buyers.”

A valid criticism is that this “explanation” for stock price movements is vacant. Sometimes people say “buyers outnumbered sellers” just trying to sound smart. Whenever stock prices begin to rise, it’s because there is more buying interest than selling interest at the current price.

Even when I disagree with people, I prefer to clarify what they mean rather than nitpicking at the words they choose. Clearly, I’ll never make it as a politician.

Friday, September 13, 2019

Short Takes: Financial Literacy, Swap ETFs, and more

Here are my posts for the past two weeks:

Eliminating Mandatory Minimum RRIF Withdrawals

Currency Exchange at BMO InvestorLine

Ancient Teachings on Earned vs. Inherited Wealth

Here are some short takes and some weekend reading:

Preet Banerjee argues that if current methods of teaching financial literacy aren’t working well, we should be trying to improve them rather than abandon them. I agree. He started the article with a clever quote: “‘I’m glad school taught me the Pythagorean theorem instead of how to do my taxes. It’s come in really handy this Pythagorean theorem season’ - @CollegeStudent on Twitter.” Much of what I learned when doing my taxes the first time isn’t relevant to me today. This is one of the challenges with teaching financial literacy: what lessons will remain relevant for decades as banks and retailers adapt their methods of undermining our attempts to manage money well? Ironically, it’s the math I learned in school that earned me a good living and gave me the tools to make good financial choices. So, I’m glad school taught me the Pythagorean Theorem rather than how to do my taxes.

Canadian Couch Potato explains how Horizons Swap ETFs are affected by the federal government’s draft legislation and what Horizons is doing to preserve their tax-efficient structure. He also explains how the recent changes to TD’s e-series mutual funds are good for investors. More good news is that these e-series funds are now accessible through online brokerages.

Big Cajun Man reports that tuition in Ontario actually dropped over the past year according to Stats Canada.

Friday, September 6, 2019

Ancient Teachings on Earned vs. Inherited Wealth

“I see that you are indifferent about money, which is a characteristic rather of those who have inherited their fortunes than of those who have acquired them; the makers of fortunes have a second love of money as a creation of their own, resembling the affections of authors for their own poems, or of parents for their children, besides that natural love of it for the sake of use and profit which is common to them and all men. And hence, they are very bad company, for they can talk of nothing but the praises of wealth.” – Socrates, Plato’s Republic

Ouch. That hit close too home for me. I built my own savings rather than inheriting it. I see my savings as my own creation, and I probably talk about money more than many in my life would like.

I tend to like hearing the old proverb, “shirtsleeves to shirtsleeves in three generations,” because it sets the builders of wealth ahead of those who inherit and squander wealth. But Socrates sees this very differently. He prefers those with inherited wealth because they’re willing to talk about things other than money.

I never thought of it in these terms before, but it seems likely that those who built their own wealth prefer the company of others who’ve done the same, and those who inherited money prefer the company of others who have inherited money.

Fortunately, I have a few hobbies not related to money.

Wednesday, September 4, 2019

Currency Exchange at BMO InvestorLine

Every so often I’m forced to change the way I convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The basic method I use stays the same, but some of the details change as InvestorLine responds differently. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system.

Banks and brokerages hide fees in their currency exchange rates. To see the extra charge, start by taking a sum in Canadian dollars, say C$10,000, and finding out how many U.S. dollars you can get. Then see what this U.S. amount would get going back to Canadian dollars.

Many people might guess they’d get their original C$10,000 back, but they’d be wrong. In a recent test I did at BMO InvestorLine, I’d get back C$9754, for a loss of C$246 in two currency exchanges. That’s $123 per exchange. Starting with C$100,000, the cost worked out to $464 per exchange. I use a method called “Norbert’s Gambit” to reduce these costs to about C$25 and C$50, respectively.

Norbert’s Gambit begins with finding a stock that trades with low spread in both Canada and the U.S. One such stock is Royal Bank (ticker: RY in both countries). To go from Canadian dollars to U.S. dollars, I start by buying RY in Canada with the Canadian dollars. Then I sell the RY in the U.S. to get U.S. dollars. Two days later when the trades settle, I’ve completed my currency exchange. To go from U.S. dollars to Canadian dollars, I do the reverse: buy RY in the U.S. and then sell RY in Canada.

As always, there are details that can trip you up. One detail is that even though I never sell stock I don’t own, InvestorLine doesn’t record it this way. If I’m going from Canadian to U.S. dollars, I end up with a positive number of RY shares in the Canadian side of my account and a negative number of RY shares in the U.S. side.

InvestorLine automatically “flattens” my account to get rid of the positive and negative numbers of RY shares, but never on settlement day.  They usually do it on either trading day or one business day after settlement day.  Then they charge me interest on the phantom short position in my account. I’ve done this a dozen or more times in RRSPs and cash accounts, and I get charged 21% annualized for the day or two (or 3 or 4 days if it runs over a weekend). For a C$100,000 exchange, this is about US$40 interest per day.

InvestorLine has reversed this interest charge every time after I ask them to, but having to ask is annoying.  Further, the people I speak to never seem to understand the issue.  Sometimes they reverse the charge as a “goodwill” gesture, which is a funny description for returning money that shouldn't have been taken in the first place.

Some InvestorLine customers report that they don’t see these interest charges. I can think of three explanations. One is that InvestorLine doesn’t charge less than $5 interest per month in margin and cash accounts, and smaller exchanges might not generate more than $5 interest. A second possibility is that these people manage to get InvestorLine to flatten their accounts on settlement day, although I can’t get them to do this anymore. The third possible explanation is that because interest doesn’t appear until the 21st of the month, some people just might not notice the charge.

I used to send messages to InvestorLine on their internal message system asking them to flatten my account on settlement day, but this never worked. Calling them on settlement day and asking them to flatten my account used to work, but doesn’t any longer. So, I’m reduced to waiting until they charge me interest and asking them to reverse it. This has worked every time so far.

February 2022 update: For the first time in dozens of Norbert Gambit currency exchanges, BMO InvestorLine didn't charge me any interest.  Hopefully, this is a sign that their systems are now fixed and they won't charge any more interest in the future.

Below is the detailed set of steps I follow going from a Canadian to U.S. dollars. Just substitute “U.S.” for “Canada” and vice-versa for how I convert currency in the other direction. I offer no guarantee that my method will work for you, because your accounts may be set up differently from mine and InvestorLine changes their systems periodically.

WARNING: You might want to avoid trading on days with high stock price volatility.

1. Check that the next two trading days are the same in the U.S. and Canada. It takes two days for trades to settle. If a holiday closes stock markets in only one country during that time, my trades would settle on different days. I don’t proceed further unless all settlement will happen on the same day. If the settlement date is different in the U.S. and Canada, this can cause a short position and lead to an interest charge that I can’t get reversed.

2. Buy RY stock in Canada. If the Canadian dollars are coming from the sale of some Canadian ETF, I make that trade immediately before buying RY stock; there’s no need to wait for the first trade to settle. The amount of RY stock I buy doesn’t have to exactly match the proceeds from the first sale. I can buy more RY if my account was already holding some Canadian dollars, or I can buy less RY if I want my account to be left with some Canadian dollars. I make sure to account for trading commissions because the cash level InvestorLine shows doesn’t deduct commissions until two days later when the trades settle. I make sure the trades in step 2 all take place on a Canadian exchange and in Canadian dollars.

3. Sell RY stock in the U.S. This should be the same number of shares of RY as I purchased in step 2. If I’m planning to use the resulting U.S. dollars to buy a U.S.-listed ETF, I make that trade immediately after selling the RY stock; there’s no need to wait until the RY sale settles. Once again, I make sure to account for trading commissions. I make sure the trades in step 3 all take place on a U.S. exchange and in U.S. dollars. Note that I place all the trades in steps 2 and 3 on the same day, preferably in a span of a few minutes.

4. Set a Calendar reminder for 2 business days after the 21st of the month to check if I was charged interest. So far, I’ve been charged interest for at least one business day every time, even though I have no short position. InvestorLine has one-day delays between certain actions and when they take effect or become visible in my account. This appears to be the explanation for the interest charge in some cases. If you make the trades within a few days of the 21st of the month, the interest charge may not appear until a month later. I’ve had InvestorLine representatives insist that their system automatically flattens accounts without false interest charges, but I’ve been charged interest more than a dozen times.

5. If interest was charged for the so-called short position, call and ask that the spurious interest charge be removed. I get a different nonsensical response every time I do this, but they have always reversed the charge.

6. If interest was charged, set another calendar reminder 5 business days later to confirm that the interest charge was removed. The interest charge has always been removed for me, but in theory, I might have to do another round of calling and checking whether the problem is fixed.

Because I’ve included so much detail, this may look like a lot of work, but it isn’t too bad at all. It’s definitely worth it to me to save hundreds of dollars.

Tuesday, September 3, 2019

Eliminating Mandatory Minimum RRIF Withdrawals

Every so often we see calls for the government to eliminate mandatory minimum RRIF withdrawals. Ted Rechtshaffen writes this “win-win change would be cheered by seniors and likely lead to higher taxes in the long run.” He fails to mention the tax-planning strategies it opens up for wealthy seniors.

Under current rules, Canadians have to turn their RRSPs into RRIFs and make minimum withdrawals by age 71. These withdrawals are taxed as regular income. Wealthier Canadians who don’t need this income tend not to like having to make these minimum withdrawals.

Here are a few ideas for tax planning if the government eliminates mandatory minimum withdrawals.

Marrying a much younger spouse

Normally, when you die, all your remaining RRIF/RRSP assets become taxable income. An exception is that you can pass these assets to a spouse’s RRIF without any tax consequences. Currently, this tends to happen after a RRIF has been depleted by mandatory minimum withdrawals. Without these withdrawals, a full lifetime of RRSP savings could be passed to a spouse. If that spouse is young, tax deferral could continue for decades.

Taking this idea further, suppose an old man and old woman with comparable-sized RRIFs enter into marriages of convenience. The man marries the woman’s daughter, and the woman marries the man’s son. After the man and woman die, they have effectively passed their RRIF assets to their children to benefit from another generation of tax-free growth.

You may question whether anyone would go to such lengths, but keep in mind that there may be millions of dollars at stake. Do we really want a tax system that rewards this type of tax planning?

Reducing OAS clawbacks

Consider a senior who needs RRIF income to maintain her lifestyle but her income is high enough that her OAS payments get clawed back either partially or completely. She may be able to alternate between years of high and low RRIF withdrawals to reduce the combined tax plus OAS clawbacks she pays.

Income smoothing

Seniors with highly variable income could smooth their income by not taking RRIF withdrawals in high income years and taking large RRIF withdrawals in low income years.


Eliminating mandatory minimum RRIF withdrawals would do little to help typical Canadians, but opens the door for more tax-planning opportunities for wealthier seniors. I see little societal value in making this change. I’m neither for nor against reducing taxes. But it should be done in a simple way, not by allowing complex strategies to work.

I doubt we’ll see an end to calls for this change from estate planners. In addition to benefiting the wealthy, it gives estate planners more tools to make themselves valuable to their clients.