Thursday, December 3, 2009

Compliance again!!! !@#$

Well, someone was looking over my shoulder at work as I was surfing the net and writing the blog.... I have a call in to compliance later in the day about the blog. If I don't post again you'll know how it turned out!

Tuesday, November 3, 2009

Working the Line

Hilarious story at the bank today. Head office is on a new “work the line” kick. Working the line means when customers are in line we should get out of our offices and go talk to them. Head office’s reasoning is that when customers are in line at the bank they don’t like to see bankers sitting in their office, seemingly, doing nothing. To me this epitomizes how out of touch management is. I have a million things to do and have no time for aimless chat. Isn't that why we employ greeters? In the afternoon today I was juggling;

1. A financial plan for a customer who wants to sell an investment property to fund a family trust so he doesn’t have to pay for hockey lessons for his sons…. Very profitable client!

2. A customer is considering bringing over his portfolio from another financial institution so I’m putting together a proposal for 500k… could bring in $10,000 in revenue per year for the bank if it works out.

3. My ebay bid on a pair of Cole Haan Air Dempsey is closing. I’m in if they close for less than a hundred… 10 minutes to go.

So, as you can see, I don’t really have time to “work the line.” And anyway, the line consists of three people;

1. An older lady clutching a bag full of pennies she wants to change to bills. Probably not even a customer.

2. A younger guy in a “hoodie.” I think his net-worth consists of 10 Tu-Pacs CDs and a half pack of Zig Zags.

3. The local multi-level marketing “businessman,” in line to pay off a portion of his overdraft.

I try to hunker down and hide behind my monitor but the manager is working her way around the offices encouraging us to show team spirit and “work the line.” I am forced out to the floor.

I turn to Tracy who has come out of her office at the same time as me. I listen to her complain about how she won’t be able to meet the deadline for her mortgages before interest rates change tomorrow. As I am commiserating, Shelly lumbers out of her office. As dumb as my manager is, I am sure that she didn’t encourage Shelly to “work the line.” Even my manager knows that is a bad idea. This could get interesting.

Just as Shelly starts to work the line, Mr. X, a real customer, enters the bank and stands at the end of the line. He owns several apartment buildings and has tons of money. I have about a million financial designations but am not allowed to talk to Mr. X because he is Shelly’s customer. Shelly has been at the bank 20 years so she "owns" the best customers,even though she did not finish high school and doesn't have an investment license. This is indeed interesting!

Shelly and Mr. X exchange greetings.

Shelly “How was your week?”

Mr X. “Oh, I was in my place in Hawaii last week. Nice… how about you?”

Shelly “Me and my hubby wanted to go outlet shopping on Saturday but we couldn’t get across the border because of (hubby’s) criminal record. Or maybe it was the child support issue. Man, were we pissed cause, like, we pay taxes and so we should be able to buy stuff at Walmart in the states, right?”

Mr. X “Ahh….?”

Shelly “Heh, do you live down by the railroad tracks?”

Mr. X “No … actually I live up in (extremely rich area.)”

Shelly, “Cause me and my hubby are looking at moving to the RV park down there…”

Mr. X blanches somewhat, opens up his cell phone and explains he has to make a call.

Shelly in parting “Make sure to call me when you are in the market for more RRSPs or stuff.”

Tracy and I were cracking up. This was so fun we watched Shelly “work the customers” for another half hour. Tracy didn’t finish her mortgages, I rushed my portfolio proposal and Mr. X may have lost all respect for our bank but we “worked the line” and had some fun.

Maybe I’m too hard on management!

Sunday, November 1, 2009

Is good investment advice possible at the bank?

I'm happy to say that after a brief, compliance inspired break from blogging I am back in the business of giving you the dirt.

Is good investment advice possible at the bank?

Most Canadians are not too fond of banks. I think this stems from the perceived lack of banking options, the high fees and the poor advice and the questionable products pushed on Canadian customers.

The first two complaints about Canadian banks used to be an issue, the lack of choice and high fees. However, in the aftermath of the meltdown in the states your banker can simply reply to any complaint with the devastating, “well you could always put your money into an American bank.” Implying, that the lack of choice and service is justified. At least the Canadian bank loses your money slowly instead of in one fell swoop.

The third general customer complaint about service and product advice is a little harder to deal with for the average banker because it is a common conflict of interest. Your average banker may not be paid to do what is in your best interest but rather to hit their numbers for the month.

For example, let’s suppose that you have some extra money and you are interested in investing. You are considering investing in;

• a Canadian equity mutual fund
• a risk free GIC
• a percentage of both

You have been dealing with a banker named Shelly for a few years and make an appointment to see her to help you with this decision. When you see Shelly she recommends the GIC option because “mutual funds are risky.” You agree since this is the bank, she is a banker and she is, therefore, the expert. So you sign the papers, lock in your GIC for the next 3 years at 1.5% and promptly miss out on a 24% rise in the TSX. Did you get the best advice?

It’s possible you did get good advice but it is also likely that the investment advice was biased.

What you and many other Canadians may not realize is that most bankers are not good at or are not licensed to provide investment advice. If fact, only about 25% of the staff at a bank may be licensed to sell mutual funds. Generally their titles might be “financial advisor” or “mutual funds advisor” or something similar. The front line staff, the lenders and the even the bank manger may have little to no direct experience at providing investment advice on anything other than GICs. So unless you talk to one of the investing specialists chances are you are going to end up with a GIC. Because bankers, like Shelly, investment licensed or not, still have to hit their sales targets.

It is possible that Shelly could refer you to the investing specialist because it is the right thing to do. In fact most banks espouse the “let’s do what’s right for the customer” mantra. However, in my experience doing what is right for the customer usually come in at a distant fourth to;

1. How close Shelly is to her sales target. She may not be rewarded for a referral as opposed to a sale.
2. Whether Shelly hates the guts of the investing specialist or not
3. How much time she had before lunch to do the paperwork (GICs = quick and easy, mutual fund referral = pain in the ass)
4. The customer’s best interest

If you are going to get financial advice at the bank make sure you make an appointment to speak to an investing specialist not just any banker. This specialist should have an investing designation such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA).

Believe it or not I do know a few excellent, bank level financial planners and investing specialists.
So good advice does exist. Look for someone knowledgeable, passionate about investments and financial planning and honest. If you find a good planner, stick with him or her. You are much more likely to get good unbiased advice from someone you have developed a relationship with.

Monday, March 2, 2009

Can You Trust Your Financial Advisor?

I've seen several blogs and articles recently that have been extremely negative in their portrayal of investment advisors and investment fees. Carly Weeks and Ellen Roseman have had great responses to their recent columns. I tend to agree with a lot of the indictments as 80% of people out there could be getting better advice.

I waded into the scrum and posted one idea that is pretty important to me, full disclosure of fees. I got a lot of heat for it, presumably from advisors who didn't like an "industry insider" spilling the beans. Did I go overboard? Let me know.

One thing that might go a long way to help regulate the Investment Industry is full disclosure of fees.

There are many different ways to be charged for purchasing investments. For investors who buy mutual funds it is imperative to stay away from DSC or “deferred sales charge” funds.

A DSC is a commission paid to the advisor to sell a product. Generally it is about 5% to 7% with a .50% yearly kickback to keep you in the product. Because the fund company has paid a large upfront commission to the advisor it needs to lock you into the fund in order to recoup its expenses. They do this by charging “you” not the advisor if you need to redeem funds or change fund companies. This redemption fee is on a declining scale usually about 7% in year one, declining to 0% over 7 years. If your circumstances change, the fund performs poorly, you need to move and want to change advisors etc… you will have to cough up the dough to escape, not the advisor.

Advisors who sell on a DSC basis usually do so with trickery. Phrases like, “if you remain invested for the long term there are no fees, or “this mutual fund has no fee” are common ways to semi-disclose DSC fees while ensuring you do not understand what you are paying for. Would any reasonable person pay their advisor 5% or 7% upfront to lock them into a product when the same product with no upfront fee is available?

Why do advisors and companies do this? Most advisors are struggling to fund their lifestyle and the large upfront commission helps to keep them in cuff links. The companies like the revenue stream and the locking in of customers. Plus, an advisor who locks in a customer has more time to prospect for new clients. Who cares if the customer calls? The advisor already got paid.
Companies well known for DSC fund sales are Investors Group and Edward Jones. I believe it is a company policy for them to charge DSCs.

The most insidious sales practice is “DSC churning.” Here an advisor switches you into a new fund without waiting for your redemption charges to expire. In this way he can charge you a full 7% commission every few years. Meanwhile you are paying a redemption fee, which might be 5% after two years. This can deplete your funds fast!

The big banks generally do not have DSC fees. They have “no load” or no upfront commission funds. The fund will pay a higher 1% trailer or kickback to the advisor for continued advice, though. This method of sales is much preferred as you can make changes at any time. But, make sure you are in communication with your advisor as you are paying him for advice and support.

My advice to the industry is that we include a full disclosure clause for DSC products. For example, “you have chosen to pay me a 7% upfront fee to lock you into this product. If your circumstances change and you want to get out you will have to pay onerous redemption charges. There is absolutely no reason, other than helping me to pay by BMW lease, why you would choose this option when there is a no upfront fee option available.”

I’m out like insidious sales practices….

West Coast FP

Friday, February 27, 2009

The Registered Disability Savings Plan – A great plan for Persons with Disabilities

This year’s RRSP contribution deadline of March 2nd is looming. Monday March 2nd, is also the deadline for the lesser known Registered Disability Savings Plan (RDSP.) While some are waffling on a RRSP contribution this year the RDSP is a must for most of those who are eligible.

The RDSP is a savings plan intended to help Canadians with a severe disability to save for their long-term security. Anyone who is Canadian, under 60 and a recipient of the Disability Tax Credit (DTC) is eligible for the RDSP.

What is the DTC?

The DTC is a non-refundable tax-credit that reduces the amount of tax that an individual with a severe and prolonged physical or mental impairment may have to pay. This tax credit is transferable to a supporting relative if Persons with Disabilities (PWD) have no income. It is estimated that approximately 1,000,000 Canadians could qualify for this tax credit but have not been certified.

Why was the RDSP introduced?

The financial situation for PWD might be surprising for people not familiar with the rules. A person receiving PWD benefits can receive disability support for dental and medical benefits, prescription drugs, transportation passes, access to the Disability Tax Credit and other benefits. However, if a PWD exceeds certain asset and income levels they can lose these benefits. For example a beneficiary who is receiving PWD benefits can only have a maximum of $3000 in the bank, one motor vehicle (a Chevette or a Porsche are equally acceptable) a primary residence, one or more trusts and specified assets.

Given these strict conditions it can be difficult for PWD to obtain financial security and independence. Most families offer “under the table support” in order to provide assistance and not disqualify the beneficiaries from government support.

Trusts are a great tool but are not very accessible for lower income PWD. In a PWD trust assets are held on behalf of the beneficiary but do not reduce government benefits if set up properly. This is a complicated area and only a few lawyers really know what they are doing. Setting up these trusts can require assets of at least $200,000. This is because the set up costs and fees for managing the trust assets are how lawyers derive income. These fees put trusts out of reach for most PWDs and their families. Enter the RDSP. First promised in the Federal budget of 2007, BMO became the first institution to offer it in November of 2008.

How much can a family contribute?

Family, friends and beneficiaries will be able to contribute up to a lifetime maximum of $200,000. Most people will want to contribute on a yearly basis, however, in order to maximize the Government Funded Benefits; the Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB.) Investment income earned in the plan accumulates tax free but the contributions are not tax deductible. Once funds are paid out of the RDSP, family contributions are not included in the beneficiary’s income for taxation, but the CDSGs, CDSBs and the investment income is taxed at the beneficiary’s personal tax rate. A great benefit of this plan is that RDSP payments, depending on your province, do not affect disability benefits, nor affect federal income tested benefits such as the Canada Child Tax Benefit, Old Age Security or Employment Insurance Benefits.

How much are the Government Funded Benefits?

The government will contribute both Canada Disability Savings Grants (CDSG) and Canada Disability Savings Bonds (CDSB) based on the family’s contribution and the family or the beneficiary’s net income.

· If the family’s income (if the beneficiary is under 18) or the adult (18 or over) beneficiary’s income is less than or equal to $75,769 the government will provide a CDSG of $3 for each $1 dollar contribution, for the first $500.
· The next $1000 family contribution is matched $2 to $1.
· So a $1500 family contribution will attract a matching government contribution of $3500. Surprisingly generous!
· If the family or beneficiary’s income is over $75,769 the government contribution is limited to $1 for each $1 contributed, up to $1000.

Depending on the family or PWD income the government may also contribute a CDSB annually into the RDSP.

· If your family income is $21,287 or less, a $1000 CDSB is contributed
· If your income is between $21,287 and $37,885 then the CDSB is a prorated amount based on a formula in the Canada Savings Act.
· For income over $37,885 no bond is paid.

All of the above income thresholds will be adjusted annually for inflation.

The lifetime limit for the CDSG is $70,000 and $20,000 for the CDSB. So this plan really favours someone who has 20 years to go until they turn 49, the last year in which the Government will provide benefits.

How can I access these funds?

If the beneficiary is 27 or older and if the family contribution is greater than the government bonds and grants (Assistance Holdback Amount) a Disability Assistance Payments can be withdrawn for any purpose. This situation is probably not likely for most people, though.

Most beneficiaries will start to receive annual Lifetime Disability Assistance Payments at a certain age, such as 40, 50 or 60. The CDSG and CDSB are only accessible after 10 years.
As an example take Sarah, a young adult with a learning/ mental disability who starts RDSP contributions at age 21. Sarah is the beneficiary but Sarah’s Mom is the Account Holder because Sarah has not been good with money in the past and has had a “boyfriend” and several multilevel marketers convince her to make poor financial decisions. Sarah has annual income of less than $21, 287. She contributes $100 per month from her part time job and her family contributes an additional $50 per month in lieu of birthday and Christmas presents. This total annual family contribution of $1800 attracts a matching CDSG of $3500 and a CDSB of $1000 for a total yearly contribution of $6300.

Let’s assume that Sarah and her mom invest for the long term with an asset mix of 50% Canadian equity and 50% fixed income. The expected return is 7.5% annually. Sarah will contribute for 20 years in order to maximize the government contributions of $90,000 and then start to receive payments from the plan at age 42 in order to improve her quality of life. This is also the age in which her parents are expected to pass away so Sarah’s sister will become the Account Holder to help manage the funds. There are lots of Will and Estate planning issues here for the family to consider but this is a simple example. The funds in the plan will have grown to $272, 820 by age 42 and will provide a yearly income of about $6700 at age 42, rising to about $10,000 at age 80. Again, assuming a return of 7.5%.

The actual payout will differ as it is based on a RRIF-like formula with the RDSP balance as the numerator and the life expectancy of 80 plus 3 years minus the current age of the beneficiary as the denominator. For example $272, 820 / [(80 + 3) – current age (42)} equals $6,654 in year one. Total payments over the life of the plan in this example are about $320,000.

If Sarah were to make no further payments from age 42 but keep the funds invested and only start withdrawals at the required withdrawal start age of 60, the funds will have grown to $1,002, 832 at a return of 7.5%. This provides an approximate payout of $25,000 at age 60 rising to about $36,000 at age 80.

These are rough calculations as its getting late and I’m on my second chardonnay but it illustrates the tremendous effects of the government contributions and the power of time and compounding investment returns.

Common issues with the plan

· New Canadians / children with no tax history – You need two years of tax history and for children under 18 you need to apply for the Child Tax Benefit in order to qualify. CRA seems to be lenient in this regard provided you promise to file tax returns for the previous year and apply right away for the CTB

· Beneficiaries over the age of 18 but not mentally competent – Often parents are not legal guardians of their adult children but want to be the account holder in order to be responsible for the funds. So far, CRA and the financial institutions are being lenient, basically accepting the word of the account holder that the adult beneficiary is mentally incompetent. Most likely this will change in the future with proof such as the copy of the DTC application or legal papers needed in order to prove mental incompetence.

· Little or no funds available to contribute given the short deadline – a loan for $1500 will maximize the Government Funded Benefits. This equates to a $125 payment per month plus interest over a year. This is not an issue for someone 28 years or younger but should be considered for someone older.

· The RDSP really favours the young. If you are 49 or older and cannot receive CDSGs and CDSBs, the decision to open an account is not clear cut. You have to consider “disability benefit reducing” saving plans such as RRSPs and the TFSA, compared to “non-disability benefit reducing” plans such as trusts and the RDSP. It can be quite complicated and really requires a full financial plan with additional support from a knowledgeable trust attorney and an accountant familiar with disability benefits. Most professionals are not up to date with these issues.

· The DTC has been criticized for the difficult and or unfair application process. Especially for those with a mental impairments.

· Investing too conservatively and not considering the effect of inflation. Most people are scared witless about the market and are funnelling their funds into GICs, if anything. Historically, stock market downturns of this magnitude have been followed by returns of 20% to 30% in the following years. The RDSP is a long term savings plan and should incorporate equity investments to create growth. The effect of a 4% return compared to a return of 7.5% is remarkable.

· Lack of knowledge and participation. At writing, only one financial institution is offering this plan. Kudos to BMO, but not many people are aware of this plan and virtually all financial advisors have not taken the time to study the plan. Hopefully this will change.

Sign me UP!

At the time of writing it is just BMO who offers the plan. You can reach their Investment Center at 1-800-665-7700.