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?

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!

Credit card fees – revisted

I think it is reasonable to assume that most Canadians are now aware that the Competition Tribunal tossed a complaint about the excessive fees being charged by credit card issuers (mainly our big banks) and the impact of those fees on small business and consumers. Even more interesting is the fact that the reasons for the decision to dismiss the complaint are being withheld from the public! I wonder what the Tribunal is trying to hide? Is that “independent” Tribunal really in place to protect consumers and small businesses or rather large financial institutions?

As I commented in earlier blogs, nothing in life is free – including the use of credit and the accumulation of “rewards points” or other forms of loyalty incentives. Everything has a cost, and despite what some governments and tribunals claim to the contrary, there is only one payor of these fees and that is you and I – the ultimate consumer of everything produced in our economy.

Somehow, these large institutions (that make somewhere between 5 and 7 BILLION $ per year from Canadians paying these fees) managed to convince the Tribunal that this was in the “best interest” of Canada and Canadian consumers! It must have been very creative and ultimately persuasive and maybe that is why the Tribunal doesn’t want to release all documentation to us. Good heavens, we might even be able to draw our own conclusions that we are being ripped-off and no-one is prepared to take a stand.

I am not a fan of government intervention, but the voluntary code introduced some months back by the Federal Government, hasn’t done anything and maybe the code should become law.

Investment Industry needs independent players!

The most recent print issue of Money noted that the big Canadian banks managed to earn $31.7 billion in 2012, just a few years after there was grave concern that they’d even remain solvent.

“There is no question that Canadian banks play a vital role; locally, provincially, nationally and inter-nationally. Without the banks, our economy could simply not function efficiently or effectively. But are the banks getting too big and going too far to gain market share and profits at the expense of their own customers?” (Quote from Spring 2013 issue of Money Magazine.)

In November of last year I published a piece entitled Banks own the investment industry! A good thing? In many respects allowing the banks to provide everything from our mortgage to investment services is incredibly convenient. But at what price? It has become near impossible for many smaller investment dealers to stay in business. Fraser Mackenzie is a recent victim of an industry that requires scale in order to compete:

At their shareholder meeting on April 29th, 2013 it was decided: “Our assessment of the current business climate has led the owners to conclude that deploying our capital in the continuance of our regulated investment dealer businesses can no longer generate an acceptable rate of return. Institutional interest in early stage mining and oil & gas companies, sectors to which we have been heavily committed, has dried up: as has the associated trading in the equities of early stage resource companies. Furthermore, the regulatory cost burden is increasing at a time that industry-wide revenues are declining. On balance, it makes sense for our shareholders to re-deploy their capital.”

Indeed, well over half of the total value of trading done on the TSX in a typical month is conducted by the banks.

My guess is their actual market share of all trading is far above half if we were to also include trading platforms not part of the Toronto Stock Exchange. The banks keep growing, and the regulatory burden also grows more onerous. In my estimation, the larger financial companies relish regulation as an additional barrier to entry. Regulatory oversight is a minor inconvenience to the big banks, whereas for less diversified specialty businesses (mutual fund companies, standalone investment dealers, investment managers) the added expense can be devastating.

Obviously there are huge benefits to scale – but do consumers really benefit or are these economies of scale all kept as bank profits? MER’s for their proprietary mutual funds might appear very reasonable, but it’s impossible to determine whether or not the plethora of fees I pay for other services are subsidizing these seemingly lower expense ratios. Transparency is near impossible. Although many banks did collapse as a result of the the financial crisis, the massive rebound in the profitability of those surviving banks (even though they lost ridiculous amounts of capital doing stupid things with asset backed securities, derivatives trading etc.) suggests that those everyday fees paid by consumers and businesses must exceed the marginal cost of providing these services by quantum leaps and bounds.

Another concern I have – besides the demise of competition in the financial services industry – has to do with motivation. It’s true that every business is designed to make money, but in days of yore a mutual fund company, investment manager or stock broker had to have happy customers in order to succeed. If they didn’t help the client make money, the client would go somewhere else. I believe that as each independent firm disappears, so does choice. Making a great deal of money from you no longer requires you to be served well. What are you going do? Go to another bank?

The prime directive (to borrow an expression from Star Trek) of the financial services behemoths is profits. The financial advisor’s role is to enhance corporate profitability. Financial advisors today are increasingly handcuffed not just by regulatory compliance, but also ‘corporate’ compliance. Wouldn’t an investment specialist whose only mandate is to do well for his client be more properly motivated (and less conflicted professionally)? Would your investment objectives be better served by an independent advisor who is rewarded only because you the client are earning profits (and not because you are earning his employer more revenues)?

It isn’t necessarily true that an independent advisor is any better than one employed at a bank. I personally know of hundreds of outstanding advisors working at banks and insurance companies. But it must also be true that a satisfied, properly motivated, objective and focussed financial professional will do a better job whether he/she is at an independent or a bank.

We can’t begrudge the banks their success but left to their own devices, they’d all have merged into one by now. In December of 1998 then Canadian Finance Minister Paul Martin rejected the proposed mergers of the Royal Bank with the Bank of Montreal and CIBC with the Toronto-Dominion Bank. We know from our U.S. history that government and regulatory authorities are frequently frustrated by the political muscle (lobbyists, lawyers) of the large financial firms. Ultimately having one gigantic Canadian bank – providing all our financial services, investment needs, insurance requirements – might (or might not) be a worthy corporate ambition, but it’s hard to imagine such a monopoly being good for the likes of us. After all, just consider the progress that has been made in telecommunications since Bell Canada (or AT&T) was forced to reckon with serious competition.

The banks need independent players. Not only should banks discourage the obliteration (by bullying or by absorption) of non-bank competition, they should use their political muscle to keep the regulators from picking on Independent players. Government agencies cannot help themselves – if they are impotent against the strong they naturally attack the weak – even though when all the weak are dead the regulators would have no jobs. You don’t need a police force when there’s nobody you can effectively police.

Independent players create minimum standards of service and ethics, and fuel industry innovation. In every instance, the independent is a bank customer too. Mutual fund and investment managers pay fees to banks, buy investment banking offerings, custodial services and commercial paper and also trade through bank facilities. Independent dealers provide services and financing to corporations deemed too small to matter by larger financial companies; that is, until these businesses grow into large profitable banking customers. Put another way, why not adopt the Costco model where smaller independents can shop for stuff to sell to their own customers, and higher end specialty shops and department stores can all remain standing, rather than the take-no-prisoners approach of Walmart?

Let’s hope that the few surviving independent firms can be allowed to thrive, and if we’re lucky perhaps new players will arise to provide unique services to Canadian clients and homes for advisors who are inclined to specialize in managing and not just gathering assets.

Mal Spooner

 

 

 

 

 

Mutual Fund Mania – Choose wisely during RRSP season!

Usually the first vehicle of choice for new investors is a mutual fund. In days of yore, which in the investment industry is more than five years ago, investors usually bought equity funds but in more recent times balanced funds have grown more popular and even bond funds have attracted money.

Oftentimes, the first mutual fund experience is a disappointing one. There’s a reason for this. People intuitively want to be associated with success, so their first mutual fund will have these characteristics:

  • A great track record of top quartile performance over at least three to five years.
  • Billions of dollars invested in it, so it is “safe.”
  • Offered by an investment firm with a long and “distinguished” history.

Many years ago, there was much less data readily available and few statistical tools at one’s disposal, but I was curious and decided to examine a group of funds over time to see what their performance looked like. What I discovered is represented in the chart. There were no exceptions; every fund in my sample followed this same pattern.

It doesn’t take a mathematician to interpret a picture. If you invest in the fund when it’s a dog (ranks very poorly compared to other funds), the odds are great that given time it will be a top performer soon enough.

The problem is that most investors will pick a top performer. However, the top performer will soon become a dog, and the investor will be unhappy.

A great track record might actually guarantee poor performance.

When it comes to your money, intuition sucks. You “intuitively” steer towards something that “feels good.”

There is enough publicly available data nowadays to help you find a few funds that suit your tastes and examine their performance patterns. What suits your tastes may include funds that are easy to buy in and out of, those you have read about in the press, whose portfolio manager sounds smart on TV, or you may prefer socially responsible funds. When one of the funds that does occasionally perform very well has been in a slump over the past year or two, buy it. After the performance has improved over the course of a couple of years and you’re happy with the results, consider selling (or redeeming) it when the fund is in the top of the rankings (or wins an award) and buy a different fund that is in a temporary slump.

Being a curious sort, I once had the urge to see if award-winning funds followed the same pattern. After all, if someone wants a top-performing fund, wouldn’t they head straight for the ones that have just won awards for their outstanding performance?

I looked at the award-winning funds in any given year, and then checked their performance just one year later. Rather than examine every category (there are just too many nowadays) I stuck to basic Canadian equity, U.S. equity, small cap, international equity. Included were “thematic” funds popular at the time, such as ‘precious metals’ and the ‘dividend and income’ funds. Here are a couple of examples of what I usually found:

Results:

  • 100% of the winners were either 1st or 2nd quartile funds. The next year, 88% of these had fallen to 3rd or 4th quartile.
  • All the former 3rd quartile funds (dogs) rose to 1st quartile (stars) in the following year.

Winning an award (being a top performer) is not an indication of how that fund will rank in terms of its future performance, even in the following year. In fact, the odds are awfully good that your 1st or 2nd quartile pick will be below the median or worse one year later. Interesting! If there’s a lesson, I suppose it’s simply that funds should be bought because they meet your objectives, not because they’ve been performing well recently.

It’s not important to understand why this roller coaster occurs for mutual funds, it just does. Markets change, so, for example, when a growth fund invested primarily in technology stocks suffers, it’s no doubt because the upward trend in technology stocks, or their popularity among the herd, has either stopped or deteriorated. Apple is a prime example in the news right now.

Portfolio managers are just people working for people. I’ve witnessed the following scenario occur time and again:

  • Fund performance begins to soar.
  • Fund attracts lots of new money.
  • Marketing folks want more and more time from portfolio manager for meetings.
  • Money pours into the fund in droves.
  • Portfolio manager’s head swells (the “I’m a genius” syndrome).
  • Performance begins to deteriorate.
  • Money leaves the fund in droves.
  • Portfolio manager has to sell the fund’s best stocks (there are still buyers for these).
  • Performance sucks, and it takes two to three years for things to get back to normal.

Size really doesn’t matter…unless the fund is humongous.

A thinking person should be able to figure out that it doesn’t take a big fund or a big fund company to provide good performing funds. Think about it. Do you shop at the big box stores because the level of service is better? Is the quality of the merchandise better? No. You shop there because the economy of scale for the store allows them to buy products at a lower cost. They can order in bigger volumes and squeeze their suppliers. They then pass these savings to their customers.

Larger financial institutions enjoy similar economies of scale. Of course, the transactions and administration costs of the bank or insurance company are lower, and these benefits might come your way in the form of lower fees and expenses, but we’re not talking about buying lawnmowers. Rates of return on funds managed nimbly and intelligently can make those fees and expenses pale by comparison.

Bigger is safer possibly when you’re banking, but legitimate capital management companies are structured so that they never really touch your money. The custodial (where the money is physically held) and administrative (recordkeeping) functions are usually provided to these firms by big banks or huge financial institutions anyway—for safety and regulatory reasons and it makes the potential for fraud near impossible.

The reason why large financial services companies got into the fund management business was simply economics. They were providing banking, custodial, and administrative services to mutual fund and other asset management companies anyway, so why not also earn management fees by offering their own mutual funds and private wealth management services?

Take it from someone who knows from experience. Managing a massive quantity of money in one fund is much more difficult for a portfolio manager. You can only buy big companies. A portfolio manager will try to buy the best big companies, but since everyone else with big portfolios is doing the same thing, it’s not like you can outsmart them. It’s sort of like playing poker with jacks, queens, and kings being the only cards in the deck. If the three other players see three kings on the table, everyone knows you still have one in your hand.

Applying some discipline is important when directing your savings and will spare you much grief. For several years since the financial crisis, investors have swarmed into bond (see chart – it shows the net Sales of bond mutual funds) and balanced funds because of their strong relative performance and are considered to be less risky. Even today buying into income-oriented funds ‘feels good’ – everyone else is doing it, past performance is good and the fright we all experienced during the financial crisis still stings a bit.

Equity funds have been avoided for years – constantly redeemed – despite the fact the stock market returns have been outstanding since the crisis more or less ended (or at least stabilized). Now that the past returns are looking better, investors will be shifting money out of the bond funds (and perhaps balanced funds as well) and chasing the top performing equity funds.

This is an inferior strategy. If you examine the best ‘rated’ funds you will find they hold more dividend paying and income securities and will likely drop in the rankings very soon after you buy them.

With RRSP season comes a plethora of marketing campaigns and firms will be pushing us to buy their best performing funds (we are so quick to buy what ‘feels good’). Since you won’t see many advertisements for those not doing so well today, but are likely to do very well tomorrow, it would be wise to do a bit of homework before buying in. Good luck!

Mal Spooner