Dying isn’t free (no good deed goes unpunished!)

I know this sounds a bit irreverent or flippant however it is meant to stimulate some hard thinking about the real costs of dying. Sure, there are lots of lists around, but I haven’t found 1 yet that covers everything I have seen in nearly 43-years in this industry. Is this list perfect? Absolutely not – but it will get you thinking about your own and your family’s situation. Remember, not all of these will apply to you – but some will – and the costs range widely.

* Probate Fees * Legal Fees * Copying and certifying fees * Paid searches for titles, etc. * Legal notifications to family * Legal notifications to creditors * Asset Transfer fees * Estate Accounting Fees * Terminal Tax Return Fees * Estate Tax Return Fees * Rights and Things Tax Return Fees * Ongoing Tax Return Fees if estate not settled within 12 months * Testamentary Trust Tax Return Fees *Preparing and filing tax election fees (estate and personal) * Executor and Trustee Fees (annually until Estate and all trusts closed) * Executor and Trustee disbursements – copying, telephone, faxing, certifications, mileage, parking, travel expenses * Valuation fees – real estate, listed personal property, personal property, real estate and other capital and/or depreciable property * Transfer costs for title transfer to Executor and/or Trustee and eventually to residual beneficiaries * Commissions paid for asset sales – real estate, estate sales, sale of listed personal assets, if necessary * Commissions paid to investment advisors for selling stocks and bonds not held in managed-money accounts *Income taxes payable – terminal tax return, estate tax return(s), Rights and Things tax return, Trust tax return(s) * Tax due on transfer of pensions and registered assets to other than spouse * Shrinkage of realisable asset value due to urgency of sale – tax paid on FMV not $ received – must replace lost $ * Account closing fees on nominee accounts and self-directed investment accounts
* Court fees – Probate and other as necessary if Will contested * Court costs if you die intestate * Banking Fees – estate bank accounts, trust bank accounts * Rental Fees – safety deposit box or other secure location *Funeral, memorial and related costs – cultural, faith-based, community or family expectations. Wake or similar * Costs of collecting promissory notes owed to deceased – loans to family members and businesses * Terminal care costs not covered by Government, group or personal plans * Legal costs to defend Will from challenges * Payment of all legally enforceable debts – including ones you guaranteed or co-signed * Perpetual pet care * Costs of care for children and other dependents (maybe your parents!) * Cost to close your social media accounts * Payment for ongoing business management until it is sold * Short-term emergency funds for survivors * Ongoing income for survivors including education costs * Cash Bequests * Murphy is alive and well – expect a visit along with family discord! * Your guess: ______________________________

I can promise a few things about this list: a) your estate will have at least one cost not included here; b) you will be very unpleasantly surprised at the total amount of money (and time) involved; c) your estate will be cash-poor – not enough cash in the bank to pay these costs which means that; d) the net value of your estate, without proper planning and a source of replacement tax-free cash, could even be bankrupt which means your family and heirs would get zero. Do you and your family need assistance?

Lifting the veil on ETFs – Part 4 of 4

Warning about the fees and costs of ETFs
The expense ratio is not the only cost of investing in exchange traded funds. ETF shares must be purchased through a regular stock brokerage account. There will be commissions to both buy and sell ETFs. The commissions on buying and selling ETFs are the same as for buying and selling individual stocks. An investor who does a lot of trading in and out of ETFs will see a greater impact from brokerage commissions than from the expense ratios of the funds.

Unfortunately, the costs of Canadian ETFs are not as straightforward as one might think. Most investors don’t realize that iShares, Claymore and BMO (to name a few), disclose their fees in different ways, making apples-to-apples comparisons difficult.

The first point to understand is that Claymore, BMO and others only list their ETFs’ management fee on their websites. iShares, on the other hand, lists each ETF’s management expense ratio, or MER. The two terms are not synonymous. The management fee is only part of a fund’s overall MER. It’s usually the largest part, for sure, but it’s not the whole picture.

The management fee typically covers all of the administrative costs, the manager’s compensation, index licensing fees, all fees paid to the custodian (the investment firm that holds the securities), the registrar and transfer agent (the firm responsible for keeping shareholder records). These make up the vast majority of an ETF’s expenses. However, the management expense ratio or management fee also includes some additional costs, such as GST and the fees payable to the fund’s independent review committee (IRC), a legal requirement designed to protect investors from conflicts of interest. Read the Prospectus carefully to avoid unpleasant surprises!

There is also a Transaction Expense Ratio or Trading Expense Ratio (TER) that is not quoted in the Prospectus as it is only determined in arrears. Most Prospectus’ provide an estimate of this cost – but you only learn the exact amount at the end of the year and it reduces the value of your investment. This could add up to an additional 1% or so to your costs. These expenses are primarily the costs involved with trading commissions paid by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index. It is important to add the TER to the MER for a more accurate picture of the fund’s costs.

Other fund expenses may not be included in the management fee, something you may only learn if you scour the funds’ regulatory filings and Prospectus. These may not add up to much, but ETF providers trumpet their low fees as a selling point and four or five basis points is enough to make a competitive difference and cost is cost. Remember, NOTHING is free!

Visit with me again in future issues of Money Magazine and this blog as I explore many of these issues in more detail including the difference between an INDEX FUND and an ETF.

With courtesy to:

Wikipedia, The Wall Street Journal, Morgan Stanley, iShares, Claymore, BMO, The Vanguard Group and the International Monetary Fund.

Lifting the veil on ETFs – Part 2 of 4

Stock ETFs
The first and most popular ETFs track stocks. Many funds track national indexes.

Bond ETFs
Exchange-traded funds that invest in bonds are known as Bond ETFs. They thrive during economic recessions because investors pull their money out of the stock market and move into bonds (for example, government treasury bonds or those issued by companies regarded as financially stable). Because of this cause and effect relationship, the performance of bond ETFs may be indicative of broader economic conditions. There are several advantages to bond ETFs such as the reasonable trading commissions, but this benefit can be negatively offset by other fees and costs.

Actively managed ETFs
Most ETFs are index funds and as such, there is no “management” involved. Some ETFs, however, do have active management as a means to hopefully out-perform the nominal bench-mark index. Actively managed ETFs are at risk from arbitrage activities by market participants who might choose to front run its trades as daily reports of the ETF’s holdings reveals its manager’s trading strategy. The actively managed ETF market has largely been seen as more favorable to bond funds, because concerns about disclosing bond holdings are less pronounced, there are fewer product choices and there is increased appetite for bond products.

Leveraged exchange-traded funds (LETFs), or simply leveraged ETFs, are a special type of ETF that attempt to achieve returns that are more sensitive to market movements than non-leveraged ETFs. Leveraged index ETFs are often marketed as bull or bear funds and because of the leveraging involved, returns and losses are magnified!

ETFs compared to mutual funds

Costs
The first rule to remember – NOTHING is free! Since ETFs trade on an exchange, each transaction is generally subject to a brokerage commission. Commissions depend on the brokerage and which plan is chosen by the customer. Full-service brokers typically charge a percentage commission on both the purchase and sale and may be negotiable depending on the dollar value involved. A typical flat fee schedule from an online brokerage firm $10 to $20, but it can be as low as $0 with certain discount brokers with minimum account values. Due to this commission cost, the amount invested has great impact on costs. Someone who wishes to invest $100 per month may have a significant percentage of their investment destroyed immediately, while for someone making a $200,000 investment, the commission cost may be negligible.

ETFs generally have lower expense ratios than comparable mutual funds. Not only does an ETF have lower shareholder-related expenses, but because it does not have to invest cash contributions or fund cash redemptions these costs are eliminated. Mutual funds may charge 1% to 3%, or more. Index fund (which by the way are NOT the same as ETFs – see future edition of Money Magazine) expense ratios are generally lower, while ETFs are normally in the 0.1% to 1% range.

The cost difference is more evident when compared with mutual funds that charge a front-end or contingent back-end load as ETFs do not have any additional loads at all. Potential redemption and short-term trading fees are examples of other costs that may be associated with mutual funds that do not exist with ETFs. Traders should be very cautious if they plan to trade inverse and leveraged ETFs for short periods of time. Close attention should be paid to transaction costs and daily performance rates as the potential combined compound loss can sometimes go unrecognized and offset potential gains over a longer period of time.

From loyalty programs to the true cost of credit cards

Moving past the cost of loyalty programs to credit cards

My last blog covered how the costs of all the loyalty programs are passed along to all consumers – even those who don’t belong to such programs. Credit card costs have been in the news a great deal in 2013 and even received a mention in the Speech from the Throne that opened the new Session of Parliament.

Most readers will remember the Competition Bureau finding earlier this year in FAVOUR of credit card fees being passed along to all consumers rather than just those who use the cards. The issuers of the credit cards were, of course, ecstatic with the ruling – merchants not so much and consumers not at all, but then, cynic that I am, did anyone really expect the Bureau to side with consumers over large financial institutions – both national and international in scope?

So let’s do some math (sorry). For simplicity, I will use a card issued in three flavours – a basic, no-fee, no-reward format (Bronze), a fee-based card that also provides extra loyalty bonuses in the form of “points” redeemable for merchandise gifts from the issuer’s pre-selected catalogue (Silver) and the third is a Gold card (also fee-based but at nearly twice the level of the Silver card) that gives points that can be redeemed for travel – allegedly unlimited travel without blackouts and restrictions.

Having operated business that accepted credit cards, I know all too well the costs involved. First the merchant pays a fee to be able to accept each type of credit card. Then they have to rent at least one of those ubiquitous terminals that work at least some of the time. Their banking institution will sometimes charge an additional processing fee to handle the credit card vouchers while other card issuers have a fixed-fee arrangement (as a percentage of the TOTAL amount charged, including tips and taxes!).

A typical fee schedule for this hypothetical card series would look like this:

Card User Charge Merchant Charge
Bronze $0 annual fee 1.75% of total amount charged
Silver $120.00 annual fee 3.15% of total amount charged
Gold $225.00 annual fee 4.65% of total amount charged

I am NOT quoting fees for ANY specific credit card currently in use. These are illustrative only and roughly represent a mid-point of charges currently at work in our economy. Each card issuer and supporting financial institutions are completely free to set (and change) their own fee schedules.

With these fees charged to the merchants and vendors on the total amount put on the purchaser’s card, it is no wonder that the card companies and issuing institutions are raking in obscene profits at the expense of both the merchant and consumers – regardless of their incomes.

If you were a merchant, how much of these merchant costs would you include? 1.75%? 3.15%? 4.65%? Plus somewhere the cost of “buying into” the use of the card and terminal rental has to be included – the merchant can’t afford to take any loss with margins being so tight!

Most users today have either a Silver- or Gold-type credit card so the merchant has to plan for at least the Silver fee and a large percentage of the Gold fee – say 4.15%? On everything. Whether the purchaser pays in cash, uses a debit card (there are fees for these cards too but are usually less than .60% depending on merchant volume) or a credit card. Oh, the merchant also pays GST and possibly PST on top of these fees!

The low and modest income person or family who can’t qualify for any credit card, well, they are all still is paying the fees. Is this fair? This says nothing of the usury interest rates of sometimes more than 24% being charged on any outstanding balances.

Make sure you understand the costs and how they affect you!

Travel Insurance – outside Canada

Greetings once again and I am going to pickup from last week’s topic of the need for travel medical and dental insurance – this time looking at things outside Canada.

First, of course, the quality of emergency medical and dental care varies widely around the world – particularly outside North America, the European Union, parts of the Pacific Rim and Austral-asia areas. With that as a given, let’s look at coverages.

Many plans have exclusions or limited benefits payable if you have a flare up/emergency related to an existing medical condition – such as a history of heart problems, diabetes, stroke, etc. READ THE LIMITATIONS BEFORE YOU BUY! I am not aware of any travel insurance policies that cover costs incurred on a “medical” vacation or for cosmetic procedures or treatments.

The questions on the application must be completed with 100% accuracy – if you are not sure how to answer them, go and see your doctor – do not “guess” at the answers – this can easily result in your claim be denied or severely restricted. Listing of your medications, dosage and duration of treatment or use of that medication will also be required. Check if the plan has a toll-free number for emergency personnel to call and get approval for treatment. Check if you have to pay the bill yourself first and then submit a claim to the insurance company or if the medical providers can bill the insurance company directly.

If you travel regularly out of Canada, you may be better off purchasing a multi-trip plan that gives you coverage for a full year for a number of trips of varying durations.

To quote the Ontario Ministry of Health and Long Term Care: “You are strongly advised to purchase additional health insurance every time you leave Canada and ensure that the supplementary insurance you have purchased provides adequate coverage.”

Travel Insurance – needed in Canada and overseas!

As we approach year-end, many Canadians are planning for trips abroad to escape some of our winter weather and for holiday trips to other parts of Canada. So for the next couple of blogs, I am going to point out some issues and considerations of which people need to be aware. I will start with travel within Canada but outside your Province or Territory of residence.

Many people are under the very mistaken belief that they are fully covered for accidents and illness by their own Provincial/Territorial medical plans – nothing could be further than the truth! While not well publicised, your Provincial/Territorial plan ONLY covers what your home province would pay to their own healthcare providers – NOT what another jurisdication might pay to their providers.

Maybe an example would help here. In Province A, the fee paid to a hospital for admitting someone to an Emergency Ward is $800.00, the fee paid for taking x-rays of a broken arm and having the x-rays read by a radiologist is $400.00 and then applying a cast, using necessary anesthetic results in a payment of $500.00 – total amount paid to the healthcare facility is $1,700.00. If this is your home Province or Territory, you don’t pay anything (although some jurisdictions now have a user-fee for such visits).

But what happens in Province B for the same accident? If Province B’s fee payments are LESS than Province A, then no problem, the healthcare facility bills Province A’s plan and everyone is happy. If Province B’s payments are MORE than Province A’s – you have a problem! You will get a bill from Province B – and you may have to give them a credit card or cash payment while you are being treated!

While the differences in the example may be modest, if you require admitting to hospital – say in the Intensive Care or Cadiac Care Wards, payments can vary widely between Provinces and Territories and the last thing you want is a bill when you check out!

Some group and private extended health plans will reimburse a portion of such out-of-province costs – but there will be limits on such payments.

Most financial advisors, other groups such as CARP and the various branches of the Canadian Automobile Association, together with many travel agents and on-line ticket sellers, offer travel insurance at very modest cost – and it is needed when you travel outside your home province – as the old slogan goes “don’t leave home without it!”

Next blog will discuss the out-of-Canada issues and some tips to consider.