But about half of Canadians are: read Rob Carrick in the Globe and Mail "One in two Canadians is a bundle of nerves about money".
At High Rock, we do Wealth Forecasts (prepared by our Certified Financial Planning , CFP, professional) for all of our clients: from ages 25 to 85 (because we also have multi-generational families that we are working with) before we even begin to discuss investing strategy and there is no obligation to work with us if we are not the right fit.
We leave that for you to decide.
However, we also know that a Wealth Forecast is not worth the paper it is printed on if it is not regularly monitored, updated and the accompanying investing strategy adjusted to ensure that whatever goals you have are within your reach.
So that is what we do.
We can set up automatic withdrawals into your investment account from your bank account so that you can become comfortable with the payments and it just becomes part of your regular monthly cash outlay.
We can't force you to save. You have to take that initiative, but we can help you get it started, by creating a plan and helping you steward that plan forward.
It costs you less than many mutual funds do, so it is cheaper than what most banks can offer.
And it is personal (not robo) service.
Help yourself if you are in the 47% of "money-stressed" Canadians. Our clients sleep at night. It is amazing what seeing your net-worth projection can do for you and how much it can motivate you into believing that your financial goals are achievable.
On this week's High Rock Weekly Video, Paul and I briefly discussed the long-term returns that we use to justify our expectations for long-term client portfolio growth assumptions.
We think that a portfolio of a blend of our 3 models should be able to achieve somewhere in the vicinity of 5-6% average annual growth over a multi-year period (before fees and taxes).
I thought I might go into this in a little more detail:
As we are reasonably close to the end of the 2007-2017 investment cycle (peak to peak), if we look at a global equity index (I normally like to use the MSCI All Country World Index, but there wasn't quite enough Bloomberg history, so I am using the MSCI World Index , fewer constituent companies, but generally the same idea) over the last cycle:
The 10 year average annual return has been approximately 7.45% in C$ terms (some years better than that average, some years significantly worse). That would represent a globally diversified equity portion of a portfolio.
In a 60% equity portfolio, this is a weighted annual average return of 4.47%.
As for the fixed income component, we can use the Canadian Bond Index ETF XBB:
The 10 year average annual return here has been 4.49%. This represents the fixed income portion.
In a 40% fixed income portfolio this is a weighted annual average return of 1.80%.
Combining both of these gives us a total annual average return over the cycle of 5.87%.
Of course, historical returns are no guarantee of future returns, but can we let this be our guide for our expectations for future returns?
In the future, as we tell our clients, we will likely have some years that fall below the average annual return and others that might exceed the average.
As we take a longer-term perspective, we consider the most important part of our work to be not just getting decent (relative to historical averages) returns, but to get these returns in light of taking reasonable risk.
At the moment the risk free rate of return (a 90 day Government of Canada T-bill, no risk in owning this investment) is a little under 1%. That will not get you much after taxes (interest income is fully taxed at your marginal rate) and inflation (in the vicinity of 1.6%, but depending on where you live and what and how you consume).
So to stay ahead of inflation and taxes, you do need to take some amount of risk with your investments. The type of risk that you take can certainly influence the outcome. That is why we focus on the return per unit of risk.
Even in a balanced and diversified portfolio, you can get risk that can unhinge a longer-term portfolio performance. Especially when the traditional correlations between equity and fixed income markets are no longer working to protect you.
The past 10 years (including the financial crisis) have hopefully provided you with something in the vicinity of the 5.87% with balanced and diversified investments alluded to above.
The next 10 years may not necessarily do the same because the risks change. Being on top of those changing risk parameters is extremely important. That is what we do to prudently protect our and our clients money: find good opportunities and understand the risks inherent in them.
More here: http://funds.rbcgam.com/pdf/fund-pages/monthly/rbf272_e.pdf
As will happen from time to time, I get to meet some bright young people (often referred to me by one of our clients) and engage them in conversation about their current investment situation (as was the case earlier this week). As is often their situation, they are hard working (at their chosen profession) and have little time (or have had little time up until now) to explore and learn more about their savings and the possibilities for building and managing their wealth. Usually, they have trusted an institution (usually a bank) to assist them with the growth of their savings.
Most are relatively conservative about the type of risk that they should be taking (which is why they have ended up talking with me) but also realize that to stay ahead of inflation in the longer term, they are going to have to do better than low yielding GIC's.
They often have a somewhat difficult time getting hold of their bank advice giver to find out exactly what their returns have been and what fees they have been paying.
CRM2 (the legislation that requires both $ fee outlays and annual portfolio performance) is supposed to make this easier, but apparently the conversation with their advice giver does not offer up a whole lot of clarity.
I, in no way want to bash the institution above (who I bank with and actually get pretty good personal banking service from) however, if you look closely you will see that this particular mutual fund (which I am using only as one example amidst thousands of others), which their asset management division manages, has 5.6 BILLION dollars under management.
The cost of the managing of this balanced fund (to the investor who has their money invested in it) otherwise known as the MER is 2.16% (see above) annually.
If you invested $10,000, 10 years ago (pretty much the full investing cycle, through the 2008 crisis) in this fund you would now have $13,686 (according to the above chart) a little over 3% per year in growth. Likely, you paid over $2,200 over this same time frame just in management fees alone. You probably do not realize that you have paid them because they are listed in the fine print and rarely part of the conversation with the advice giver.
How does 5.6 Billion dollars find its way into paying such an exorbitant amount in management fees?
At High Rock, as an example, we can cut that management cost in half. We run balanced portfolios and charge our clients a management fee of 1%.
So why on earth would anybody pay 2% for a balanced mutual fund that only returns 3% ?
Why are 5.6 Billion dollars (in this one fund alone and there are thousands of these funds out there) doing so? It makes no logical sense.
I would suggest that it is because it is just not being made clear to the investors.
The intelligent people that I talk to, when they finally have the time to realize that their money has not been growing as well as it otherwise should have, can't seem to get straight answers from their bank advice giver.
The straight answer is: you have been paying too much and it is not in your institution's best interest to tell you. So they don't. They hem and haw and avoid directly answering the question.
At High Rock we don't avoid the question. Which is the way it should be: total transparency above and beyond the CRM2 requirement. You can also throw in great client service and fiduciary responsibility as well. We not only try to get the best risk-adjusted returns, but also save our clients money in fees and costs.
Ask the tough questions. If you don't get good answers. We have them for you.
According to President Trump, he is responsible for the stock market rally and the record highs that it has achieved (more here: https://www.bloomberg.com/news/articles/2017-11-06/trump-just-took-credit-for-the-stock-market-s-huge-rally-again).
Others might suggest that corporate earnings are responsible, although it may depend on how you look at those earnings and whether or not they are over-achieving or not.
We won't get drawn into a political debate (we remain politically agnostic) and we have our opinions on earnings and their expectations being more than built into current pricing.
Current pricing is suggesting some 30% annual average earnings growth above the 10 year average over the course of the next year: 12 month forward looking Price to Earnings ratio is 18 times, the 10 year average is 14.1 times, which includes expected earnings growth of 10% over the net year). With economic growth of just above 2% (12 month moving average) as we discussed in last week's High Rock weekly video, we see this as a stretch. In other words, buying the S&P 500 ETF at this point in time would not be prudent as it is fraught with the risk that it may not meet investor's very high expectations.
You may have to click on this (above chart) to enlarge it, but the message is clear, investors are being emotionally driven by the psychological biases that always appear in their behaviour.
That is a trap that we do not want to fall into.
That does not mean that we are not continually scouring markets for opportunities: When the C$ over-reached in late summer, we used that opportunity buy $US. When the Canadian equity market was the worst performing developed stock market, we decided to add to our holdings and when General Electric broke below $20 last week (down almost 40% from late 2016's highs), we put a little of our $US to work.
Everything we do is measured and relative to our return per unit of risk targets.
When US equity markets get cheaper, we might add to our holdings of them. However, until that time, cash (or cash equivalent high interest savings funds) represent a tactically prudent alternative.
Meanwhile, both Canadian and US 2 year to 30 year yield spreads are narrowing, close to their lowest levels since 2007 / 2008:
Historically, when these curves flatten, a recession is not far behind. The US Federal Reserve is expected to raise interest rates in December and March, which would likely see this narrowing further (short rates higher).
Lots to concern us, so we need to be particularly careful (which is what our clients would expect us to do).
I am somewhat blessed in my life because of the nature of my job. I get to meet some really fantastic individuals from many different situations: artists, authors, athletes, media personalities, executives who run large corporations and executives who run their households, small business owners, economists, medical professionals, legal, accounting and educational professionals and those who offer up their time and passion to public service and charitable work. Some continue to ply their trades, some have moved into different chapters of their lives.
The one common denominator is that they all have tremendous experience in their backgrounds and I love the vast amount of collective knowledge that they have attained through their lives.
My High Rock business partner Paul and I started our Private Client Division almost 3 years ago, with a very simple motivation: quite simply, we wanted to offer those interested in investing the way we invest our own and our families money (which we do rather well, I may say) and provide them with the same sort of stewardship that we apply to our own family wealth. We also wanted to do it as openly and transparently as possible, especially when it comes to fees.
Trust is a leap of faith. It takes a long time to build and can be easily broken. We were fortunate to have a number of folks who trusted us right from the get go, that allowed our dream to evolve. For that we are truly grateful. The good news is that some 3 years down the road, they are still with us.
Recently, we decided that we could still grow our business further without compromising our ability to serve our clients and perhaps build more scale whereby we might be able to continue to reduce our costs and pass those on to our clients.
For these purposes, we asked a select few of our highly knowledgeable clients if they would be interested in advising us on matters of technology, marketing and other investment issues.
And so, we have added what we consider to be a brilliant "brain trust" of sorts to establish our advisory board to add their expertise in matters that we may not be so expert at. Our expertise is in wealth and portfolio management and we want that to continue to be our focus, so to have the additional support in growing our business is wonderful and greatly appreciated.
If you wish to visit our website http://highrockcapital.ca/advisory-board.html you can click on the various individuals to see who they are and a bit about them.
We do have so many gifted and talented clients that we are always open to your input. If you wish to get in touch with any feedback, we are wide open to it, so please feel free to email me email@example.com
In fact, for one of the historically most volatile months, this October has seen record lows in the Volatility Index (VIX), now sitting just below 10. If you remember 2008, volatility set record highs (above 60 on the monthly chart above).
As we briefly discussed on our High Rock weekly video (formerly known as our weekly webinar), yesterday: Central banks do not like volatility because it erodes confidence, both at the business and consumer levels, and when they are not confident, businesses and consumers postpone making economic decisions, which in turn negatively impacts the economy.
So central banks pumped vast amounts of liquidity into the global financial system (by purchasing bonds from the bond market) after the financial crisis in an effort to combat the surge in volatility that followed.
It has worked. Consumers are the most confident they have been in years (certainly in the US, chart below):
Investors are extremely confident as well! Stock markets in the US are pushing record highs (gold line in the chart below):
Bond markets (the white line) are being held by continuing low inflation.
So that is all history.
Our job as risk, portfolio and wealth managers is not to dwell on on what recent history has provided us, but to look forward to try and find the potential risks that lay in wait somewhere down the road.
Looking at the 30 year chart of volatility index (back at the top), there is a pretty clear pattern that evolves over time: a swing from higher levels of volatility to lower levels and back again.
Suffice it to say, there is a pretty strong likelihood of this pattern repeating. Volatility rises when uncertainty rises, but for the moment, central banks have reduced the impact of uncertainty (of which there is no shortage, at the moment).
Volatility spikes come when new and previously unidentified shocks (economic and / or geo-political) surprise financial markets.
Our job is to be on guard for impact of those shocks.
Having balance between equity (stock investments) and bond investments has historically proven to mitigate at least part of a spike in volatility. In 2008-2009 a 60% equity portfolio and 40% fixed income portfolio probably dropped about 15%, or thereabouts, before beginning its recovery.
At current levels, low yields on bonds and record high stock prices, that correlation no longer can offer the same protection (more on this here:https://www.bloomberg.com/news/articles/2017-10-30/pimco-quants-say-beware-of-bond-hedges-for-high-flying-stocks).
That is why (at High Rock) we advocate a more tactical approach to investing, because our duty to our clients (and our families, because we invest in the same assets as our clients) is to try to protect them, as best we can, from the ravages of volatility, which are not only potentially financially devastating, but also psychologically devastating as well.
Being defensive means that you won't likely get the double digit growth that stock markets offer when they are making record highs (although High Rock clients may notice that October added nicely to their portfolio growth). However, it also limits the potential downside, which, over longer periods of time, allows a more even and predictable growth pattern.
That is the stewardship of wealth rather than the "rolling of the dice".
Congratulations to Mr. Pinn (above), who according to a recent Globe and Mail article on Robo-Advisors (by Clare O'Hara) discovered "that he was paying more than $20,000 a year in fees" (on a portfolio of $500,000) and "decided to fire his investment advisor of 18 years". The article goes on to suggest that he has now gone from paying fees of about 4.0% to fees closer to 0.4%.
Everybody needs to take a very hard look at what it costs you to invest and what it is that you get for the fees that you pay.
If "Robo" is the way you want to go, have at it. But it is important to remember that you will get what you pay for.
Don't expect to be high on the priority list from a client service perspective, because you are not paying for it (see my July 20 blog: The Robo-Advisor Option).
If you want a truly excellent client experience and a plan (created, monitored and administered by a Certified Financial Planning, CFP professional) that sets out and truly defines your very tailored investment strategy (with direct access to the managers who implement it), also monitored and adjusted as your circumstances change (and they will, because life is very dynamic) you can get it for a bit more (but not much more) than Mr. Pinn is paying for his Robo-experience. You certainly do not need to be paying 4% or even 1.5% to a financial / investment advisor who might stick you into a bunch of mutual funds (or even ETF's, as I wrote about in my most recent blog, last Wednesday).
After the volatility of early 2016, stock markets have been pretty good to investors (and volatility has fallen to new lows), but balanced portfolios have been broadsided by both bond market performance and the C$ strength, especially if you have global diversity (which you should have) and exposure to foreign currencies by virtue of that diversity.
Stick-handling that risk requires both experience and expertise. You probably (if you choose Mr. Pinn's path forward) want to ensure that your Robo portfolio managers have the required capability to handle that risk because as we know from history, volatility can jump when you least expect it and unprepared portfolio managers can get blindsided (and so can your portfolio).
I certainly do not want to take anything away from Mr. Pinn's wise decision to research his costs and make the tough decision to end the 18 year relationship with his over-priced advisor. I wish that every bank and large investment dealer client would be so brave.
However, the next step, choosing the most appropriate investment counsel for yourself and your family is also extremely important.
Make certain that you are getting what you need, relative to what you are paying for.
There are lots of alternate choices and portfolio management companies like High Rock, who fly beneath all the advertising hype out there, that are worth looking into.
You may have to click on the above to enlarge it, but in the lower right hand corner, you will see the Management Expense Ratio (MER) for the iShares S&P/TSX Canadian Preferred Share Index ETF (CPD) or just click on the link to get a full preview. The point is, there is a cost, above and beyond what your Advisor's Fee is, that is not listed on your monthly statement (although there is a debate as to whether or not it should be, for complete transparency). In this case the MER is 0.51%. iShares (Blackrock) charges this for the Management of the ETF.
In the fine print: "MER: As reported in the fund's most recent Annual Management Report of Fund Performance. MER includes all management fees and GST/HST paid by the fund for the period, and includes any fees paid in the fund's holdings of other ETF's".
Your Advisor's Fee is tax deductible. The MER is not. So if you are paying your advisor a 1 to 1.5% fee and you have a portfolio of ETF's, your all in costs could be significantly different.
I just reviewed a prospective client's portfolio, all ETF's, that had a weighted average MER cost of an additional (approximate) .35%.
That is where a portfolio management company, like High Rock can give you an advantage. With our institutional division getting us wholesale prices for a number of the securities that we use in our client models (see Paul's blogs from last week) we rely less on ETF's and as a result are able to whittle ETF MER's (on a weighted average basis) down to somewhere between .05 - .08% (depending on the composition of your portfolio) of a total portfolio.
So we charge a 1% management fee, plus a .15% fee that our custodian levies on us (including trading costs) that are all tax deductible. Include our .08% MER fees and all in it is 1.23% (with 1.15% tax deductible)
That is a much better deal than paying 1% to an advisor, plus .35% MER costs. All in at 1.35% (and only 1% tax deductible).
Our 1% management fee gets you a Wealth Forecast (by a CFP professional), monitored and reviewed every 6 months at a minimum, portfolio management from managers who have been in the business since the 1980's (who have seen the market crashes of 1987, 1997, 2001 and 2007) and have the experience to handle it when it happens next and understand the risks involved, as well as the fiduciary responsibility that you only get with discretionary portfolio management.
What are you paying for?
Something to consider.
One of the hardest football passing plays to defend is the hook or curl pattern (believe me, I played, as a defensive back, so I have plenty of experience with this). We would always be on our guard for this particular play, it was potentially a pretty easy 8 to 10 yards for the opposing offence. However, knowing that our coverage was tight, the offence always had the option of the "fake" hook and subsequent fast break toward the end zone. That left us pretty vulnerable: many a defensive back has been left in a standing still situation as the intended receiver sped downfield, wide open, with little to stop him if he caught the ensuing pass. Touchdown!
So think of the Bank of Canada as the ultimate defensive back, protecting the Canadian economy from inflation's drive to the proverbial end zone (I remember inflation at 9% and my first mortgage at 13%). The Bank of Canada thinks it has the play "read", i.e. that it has inflation covered with its recent interest rate increases as the economy speeds along and then supposedly curls back to pick up the easy 10 yard pass. However, if the Bank of Canada gets a little too cute with its coverage (of preempting inflation) and oh, oh! they are left standing still as the economy gets soft and heads south, they will be left looking around, wondering what just happened.
The Canadian economy had a strong first half of the year, but two interest rate increases and a stronger $C have definitely had a negative impact on the consumer (with record amounts of debt), housing and exports.
The yield curve has continued to flatten (short-term interest rates are up and long term rates are up less):
When the above graph (the yield spread between the 2 year Government of Canada bond and the 30 year Government of Canada bond) now at 88 basis points (or 0.88%) approaches 0, a recession will follow. Bond markets lead all financial markets.
So basically the Bank of Canada is two 1/4% rate increases away from a recession.
That is why it is very unlikely (with inflation remaining well below their 2% target) that there will be any further interest rate increases. Otherwise, they will be getting "too cute" with the economy and leaving themselves very vulnerable to getting beat for long yardage.
Tomorrow morning prior to the bank of Canada's Monetary Policy Report and interest rate announcement, my business partner and the founder of High Rock, Paul Tepsich will be the guest host on Paul Bagnell's The Street on BNN from 6am to 8am EDT.
I started looking after these folks more than 10 years ago (I have been helping families manage their wealth and risk since 2000), they came to me with a little under $500,000 in non-registered and registered investments. They were a working couple with 3 kids and RESP's. They had their company benefit life insurance plan, they owned their home (likely valued then at about $350,000 to $400,000) with a reasonable mortgage.
They were not aggressive investors (stewards of what wealth they currently had and wanted to grow), but wanted, as most do, to have a comfortable retirement and some tax efficient method of leaving their kids some of their estate.
We (my team at the time at an independent investment company) set up a Wealth Forecast that included a Whole Life Insurance plan for their estate goals and to offer some diversification away from their investment portfolio strategy. Their retirement goals could ultimately be funded by their investments.
A couple of years into our relationship, along came the financial crisis.
I don't have all the history from this early time in our relationship (because the bank that ultimately bought the investment company we were with, made the assumption that they were the bank's client as opposed to my clients and would not release their history and files to me when I moved our business away from the bank), but I would suggest that they probably saw the value of their investment portfolio slip by about 15% in 2008 and were able to get it back to even by somewhere into early 2010.
When we moved back to an independent investment company in 2012 (from that bank) we started their investing history (from scratch) all over again. We were able to keep their history when we began the High Rock Private Client division in 2015, which looks like what you see here (about a 5 year history):
After fees, the average annual rate of return has been 7.78% over the last 5 years (Return on Investment from the above chart uses the net of fees IRR method).
You can see that there has been some volatility (mid 2014), but for the most part, we have been able to keep the growth (in green) to a relatively smooth up-slope. This is because we manage risk first and foremost.
We have the 4 year return per unit of risk chart for this client (because we don't yet have the 5 year monthly benchmark comparison data yet), but generally, you can see that we have been able to maximize return, relative to the risk that we have taken in this 60% equity, 40% fixed income, globally balanced portfolio:
Under the Actual HR PC heading in the top table (and circled in green) is the compound annual average 4 year return (absolute return) of almost 8%, the risk factor derived from the volatility of the investments (not circled) of 4.8 and the return per unit of risk of 1.65, which is the compound return divided by the risk factor (also circled in green). By comparison a benchmark of 30% SP/TSX index, 30% ACWI ETF (global equity benchmark) and 40% XBB ETF (Canadian bond index) (circled in red) has both a lower absolute return of about 6.5%, a higher risk factor of 7.0 and ultimately a lower return per unit of risk of 0.92.
So, that is how we manage risk to get that smooth upward sloping level of compounding growth (back to the green in the monthly equity growth graph above) for our client in this specific case, but also for our clients in general.
Most importantly, this is how it relates back to the Wealth Forecast and the growth of their investable assets (yellow, grey and orange) that they will have to fund their retirement goals.
And of course, the life insurance (blue) will provide tax free transfer of wealth to their beneficiaries.
Sweet success, without taking on extra risk. Good on these folks!
There is an alternative to what the banks and big investment advice firms are offering and we at High Rock are offering low cost, more fiduciarily responsible, full-service wealth and portfolio management.
We would love to help you reach your goals too!
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist