Sometimes I am just blown away at how little progress there has been in the way of improving financial literacy and the way financial institutions encourage investing, while at the same time finding ways to mislead a good portion of the investing public about what they are paying for and how it is paid.
If you can, read this recent Globe and Mail article: "Canadians still in the dark about investment fees despite major changes in disclosures".
"A 2017 study by Credo Consulting Inc. found that 62% of investors still think that they do not pay for the financial advice they receive".
If you can, friends, please forward this story or this blog on to someone you may know who may not be as well-informed. I try to keep those of you who allow me your precious time, as best as my limited writing skills will allow, to open up the possibility that there is more than meets the eye in the world of financial advice. Or perhaps send them to follow me on twitter @jstomenson as I do my part to encourage whoever I can reach to go and ask the tough questions of those who are providing financial advice.
I have worked for large banks and financial institutions at a high enough level to fully understand who works for whom. I asked the tough questions of senior management: "Who do you work for? The client or the shareholders?
Without hesitation, I was told it was the shareholders.
So what about the client?
The client is the source of revenue that powers earnings and profitability the funnels back to the shareholders in dividends and improved share prices.
The best way to improve earnings is to increase revenues and lower costs. What are the costs? In a wealth management division, client service is a cost. So how best to cut those costs? Reduce the service factor. So that is how the financial services business is evolving: bring in the clients, but limit their personal service (i.e. robo-advice).
I met with a prospective client last week: a very busy, career-driven, thirty-something (I would say "millenniel", much more communication-savy than me) who was blown away that I would come to her office to meet!
Service is never free. The regulators have made a lukewarm attempt to force advisors to show their clients how they are paid.
The evidence presented in the Globe and Mail article (above) tells me that there is still a great deal of naivete in the investing world (at the client level) and that the efforts to bring clarity to it has obviously not worked (so far). Furthermore, the conflict of interest of mutual fund companies paying commissions to advisors who sell their mutual funds has still not been resolved.
I need not tell you all that we started High Rock Private Client to bring clarity and transparency (above the regulatory requirement) to those who paid attention, but the conversation needs to reach far more, less-informed folks. I and they need your help.
We chatted about this on our first weekly video of 2018 yesterday.
If you want the full frontal, you can see it all here: http://www.bankofcanada.ca/wp-content/uploads/2018/01/mpr-2018-01-17.pdf.
Here is what I think: The Bank of Canada is looking fully in the rear view mirror and projecting that forward, hoping growth will continue, albeit to a lesser degree and also hoping that the risks that they have identified don't play out to any great extent. That concerns us and raises our risk awareness.
They have identified that the consumer is vulnerable and that higher debt service costs will be a problem for indebted households, slowing the consumer down.
The green bit is the shrinking of the consumer impact on the economy.
The wild card question is: how might this effect the housing market with all the other constraints (new lending requirements: stress-tests, etc.)? Certainly for those who can no longer afford to service their debt, they may need to consider an asset sale. If all that they have is their home, that will potentially exacerbate the issue. Throw in all the new, unsold development and the boomer looking to downsize or cash in and that could be enough to push the housing market over the cliff, if they all race to the exits at the same time.
Of course, NAFTA part 2 or no NAFTA at all will likely also apply economic brakes. The recent strength of the $C is also a factor (exports become more expensive).
As I stated earlier, the BOC has all of this considered in their assessment of risks to their outlook, but if they all start to come together simultaneously, it could spell disaster.
Remember, as the 2 year bond yield and 30 year bond yield spread (differential) narrows toward 0 (it is at 0.57% now), the risk of a recession rises. So we will also have to keep an eye on that:
(artwork by Grahame Arnould)
With an assist to Stan Buell and the Small Investors Protection Association (SIPA) for re-tweeting a blog from a year and a half or so ago that contained the following quote in regards to CRM2 (which came into effect on July 15, 2016), whereby "Investment firms are to provide an annual report that shows, in dollars, the charges and other compensation paid to the firm and your advisor for products and services provided":
"This all sounds beneficial, but if you own any mutual funds you're only going to get a fraction of the total picture. The disclosed fees that are paid to your firm and your advisor will not include the management fees charged by the mutual fund managers."
"This to me is one of the, if not, the biggest con jobs ever pulled off by the investment industry on the Canadian investing public".
"Where else in your life would you agree to have someone provide them with a service and allow them to take money out of your account without telling you how much they take - every month?"
So friends, about three years ago, Paul Tepsich and I came up with an idea: let's get in front of this CRM2 thing and create a completely transparent money and wealth management offering for individuals and families.
All in 1.15% management fee (plus or minus .05% for ETF MER's, depending on your portfolio structure): If you have $500,000 under management with us you pay $419.17 per month.
In a non-registered account that is tax deductible. Effectively, you are paying a fraction of the management fee after tax considerations.
The MER taken by the mutual fund company or ETF manager is not tax deductible.
It literally staggers me when I talk to prospective clients who have a "great" relationship with the advisor / salesperson at their banking / financial institution who is prepared to pay an MER (in many cases of 2% or more) for any reason. Even ETF MER's which are considerably more reasonable are not tax deductible, so you would want to minimize those as best as is possible.
More importantly what do you get for your fees?
At High Rock Private Client, we begin with a Wealth Forecast (prepared by our Certified Financial Planning, CFP, professional) which is very specific to your personal situation. This allows us how to assess your goals, objectives and desire for risk and prepare a tailored investment strategy for you.
Some might think that every advisory offering does that. Do they? How well do they do it? If you find yourself in a "basket" of mutual funds and / or ETF's then you are not getting a personally tailored portfolio.
Robo advice offers a selection of "baskets". And so they should perhaps from a business operation perspective: it makes sense to bundle their offerings to minimize the cost of management and limit their face to face time with clients. But that is not how we operate. We are in the business of looking after people: personal service.
A Wealth Forecast is not worth the paper it is printed on unless it is constantly monitored, regularly updated and adjusted for the inevitable changes that occur in a dynamic life.
We sit down with our clients to review every client portfolio every six months or so to determine where we are in the plan relative to where we want to be and if necessary, make changes to the strategy to stay current with whatever changes are happening in our client's lives.
When I see bank advisors selling GIC's to clients who have mortgages or lines of credit (instead of telling them to pay down the mortgage or line of credit), I shake my head.
You will likely not get long-term (averaged over many years) double digit returns, but our attention to risk will also not likely put you in harms way, which ultimately means less potential volatility and a better sleep at night. That is our fiduciary responsibility to our clients. You will not get that from your advisor at your bank / financial institution, because they do not have to provide it for you.
Low fees, better wealth and portfolio management, personal service, fiduciary duty.
And all the same safety and security of a bank: Canadian Investor Protection Fund (CIPF), Ontario (B.C., Alberta, Saskatchewan) Securities Commission licensed.
Simply a better alternative.
From yesterdays Globe and Mail: "After a long slumber, Canadian retail investors are back as a powerful force, in fact the online systems they trade through can't seem to handle the volume."
OK folks, that is the latest warning signal, accompanied by "new record" stock prices:
Investors are "all in", or at least almost "all in".
One thing is for certain, all of the good news is baked in to current prices, further stretching valuations. With analysts anticipating a 13.1% rate of earnings growth for 2018, the 12 month, forward looking Price to Earnings ratio (18.4 times) for the S&P 500 is almost 30% above its 10 year average (14.2 times).
Remember reversion to the mean ?
US tax reform and deregulation excitement, bitcoin euphoria and "high" marijuana stock trading volumes are perhaps over-shadowing the reality of higher interest rates on the horizon (with household debt at record levels).
All previous economic downturns have come on the heels of rising short-term interest rates that flatten the yield curve (the difference between 2 year and 30 year bond yields) to zero.
In Canada that differential has narrowed to 0.58% from over 1.50% at the beginning of 2017.
In the US, to 0.85% from over 2.00% at the beginning of 2017:
One more 1/4% increase in Canadian short-term interest rates by the Bank of Canada should just about push us in that direction (despite recent decreases in unemployment).
The anticipated two or three 1/4% increases by the US Federal Reserve should just about do it for the US.
Remember also that all previous recessions in the US have followed closely on the heels of an upturn in the US unemployment rate that intersects and crosses through the 3 year moving average:
At the moment the differential is 0.7.
Is it different this time?
Many will find technical rationalization (smoke and mirrors, I think) to say that it is. Many of them, the so-called experts are heavily invested in stocks right now and really want to see retail investors buying into the hype so that they can unload their investments at these record prices. Of course, that's what the "smart" money was doing last time (when it was also different).
As I say over and over again, risks are high and rising and at High Rock, we are taking this into consideration. Are you?
That is the disclaimer that we are required by our regulators to impart to our clients and prospective clients in order to make sure that we do not confuse the issue of the potential for future investment portfolio performance. Many advisors may have this disclaimer in small print somewhere in their literature, but unlike us, they are not nearly as forthcoming.
At High Rock, we also follow with a commitment to our clients to work our hardest to provide them with what we consider are the best possible risk-adjusted returns: returns that consider exactly how much risk (standard deviation from the mean, also known as the potential for loss) comes into play while attaining reasonable portfolio growth. (see chart below)
You all (Y'all) may be looking for something more exciting, you won't find it here. We don't sell excitement. You can possibly find that at your local casino. As a risk manager, I can tell you (and I am certain that you already know this) casino odds favour the house (not the gambler). Lottery tickets, by the way, are worse.
We sell long-term comfort and restful nights (with low fees, fiduciary responsibility, family wealth management, tailored investment strategy and 24/7 personal client service).
We focus on risk first. I know that is a repetitive message, but it is our mantra. We also invest our money in the exact same assets as our clients, so if I don't like the near-term risk scenario for myself (and Paul and I discuss this daily), I will not be comfortable allowing our clients to have excessive risk.
We have not changed our view for 2018, we see plenty of risk on the horizon. Unlike those who are comforted by high and rising US stock markets, we see that as risk that is high and rising. Safety lies in greater allocations to cash and cash equivalents.
Short-term (1 year returns) can and may be misleading and our understanding of natural human cognitive biases (behavioural finance) tells us that the "recency effect" will tend to create expectations based on the recent past to be extended into future decision making.
Expectations of a continuation of equity market performance going forward are easily influenced by what has been occurring (record highs in some markets).
This should (and does for us) raise caution flags. Our longer-term (5 year) absolute and risk adjusted returns for a balanced and globally diversified investing strategy (with a tactical application) are a reflection of our ability to drive portfolio growth, with a much better return per unit of risk taken (but does not necessarily guarantee future performance).
Do not let 1 year equity market returns skew your judgement. Those returns come with high and rising risk and as we expect, if volatility (which has been historically low) returns to more normal levels (reversion to the mean), that could spell trouble for portfolios with too much risk.
And as I have said before and will say over and over again (ad nauseum), most individual investors (and a good portion of their advisors) have very little understanding of the risk in their investment strategies, even if they are in a nicely balanced ETF portfolio (which is why the regulators insist on the above disclaimer). Especially when equity markets are moving higher.
Fortunately for our clients, we do.
Wishing you all a happy, healthy and prosperous new year!!
Gas prices were a big contributor to the headline CPI data for the last year to November of 2017, which increased by 2.1%. If you drive regularly, you likely experienced an uptick in your cost of living.
However, according to statistics Canada, it is not just what you consume, it is where you consume it as well: if you live in Saskatchewan and Manitoba, your year to year increase in the Consumer Price Index was 3.7% and 3.2% respectively.
Remember, everyone has their own consumption habits so your personal increase in living costs may not be what Statistics Canada's basket of "average" consumer purchases would be.
If you have the time to determine the change in your cost of living from year to year (to compare) it is a worthwhile exercise. Especially when it comes to projecting your living costs going forward, which is a very important assumption in a Wealth Forecast.
As I mentioned in yesterday's blog, a Wealth Forecast is an integral part of any investment strategy. Getting as accurate a read on your lifestyle expenses as possible is a very important part of understanding how you will reach your long-term goals.
Having an investment strategy without that understanding is like travelling without a destination. You need an end-point and a map of how you are going to get there.
If your advisor suggests that just having a balanced collection of ETF's (or even worse, expensive MER mutual funds) in your investment portfolio is enough (to get an annualized return of 6-7%), then she or he is driving you in an unidentified direction (and not considering all of the risk metrics that can come in to play). I have spent more than 35 years honing my skills in risk management, so I have a keen understanding in this department and get a huge rush from helping people avoid the potential mistakes that less experienced advisors might bring to the table.
You need to have a plan (at High Rock, we call it a Wealth Forecast) prepared by an expert, Certified Financial Planning (CFP) professional, that includes understanding what is coming in (income) and what is going out (cost of living) and is able to show you how you will get from where you are right now, to where you want to be in the end (your destination).
Yesterday a client sent me an email with a list of holdings in their CIBC TFSA:
You may have to click on the above to see it in greater detail, but what stood out to me was the first line from the client: "I didn't realize how shitty this was!!"
What is an "escalating rate" GIC? I wondered, so I decided to further educate myself: you can get more here: https://www.cibc.com/en/personal-banking/investments/gics/escalating-rate.html
But, in a nutshell, it is a "locked-in" GIC that escalates in payable interest over the 5 year time period. Check out the returns:
Again, you may have to click on the table above to see the detail, but pay attention to the far right column: "effective yield", at less than 1.5%.
If your personal level of inflation is at 1.5% (which is likely not the case, we use a 2.5% rate of inflation for our client Wealth Forecasts) then you are making absolutely no real return on this investment. Zero!
If you buy a GIC, you are effectively lending money to the institution that sold it to you. If you have a line of credit (with the same institution), you are turning around and borrowing that money right back from them at prime or prime plus whatever extra they are tacking on. Prime is 3.2% at the moment, so you are giving that institution a "gift" of at least 1.7% of your hard earned money.
Because you are not being properly looked after by that institution. Instead of saying: "oh, it would be a better use of your money to either pay down your line of credit or invest in something a little more advantageous (that might earn a return better than that which you are paying on your line of credit)", they are very comfortable and happy to take your money and add it to the other billions that they are sending to their bottom lines and paying out to their shareholders.
Because I / we care, we asked our client (in this particular case) what the holdings in their other account were, because it is important for us to understand what level of risk they might have in their investments that they hold away (from our management).
Some believe that it is safer to have multiple advisors. Perhaps, but you also have to make sure that if you are paying them (and you are, likely more than you realize), that you know what you are getting in return.
That is why we prepare Wealth Forecasts, to take a holistic view of our clients current financial position, project how they are going to get to their end goals and create a strategy for the best possible risk-adjusted method to get them to their goals.
I can tell you that a bank that so easily takes a chunk out of your financial hide, does not have your best interest at heart.
So why work with them for anything other than your banking needs, when their are folks out there (like us at High Rock) who will work with you to find the best possible solutions to your financial challenges at a very reasonable cost, with great levels of service and a fiduciary duty to always do what is in your best interest.
At the end of 2016, most analysts were calling for US 10 year bond yields to hit 3.5-4% by the end of 2017. That did not happen. Currently they sit at about 2.35%. Bond traders had a tough year.
Inflation, according to the basket of goods that the statistics folks suggest is "average", has barely budged. Central bankers continue to believe that this is due to "transitory" issues, but are struggling to explain why wages are not going up with improving unemployment numbers (deferring to a lack of productivity as the culprit).
Most clients that I talk to (when we perform their Wealth Forecast reviews) will argue that their respective annual inflation rate (i.e. the increase in their cost of living from year to year) is nowhere near and significantly higher than what we are told it is supposed to be.
This will certainly continue through 2018.
Central bankers will take heart and continue to focus on the "normalization" of interest rates and monetary policy (take Bank of Canada governor Poloz's comments yesterday as an example), removing financial liquidity from the system.
If the US government increases their deficits with tax reform and increased infrastructure spending and there is less liquidity around to support bond issuance (to pay for all the new debt and deficits), asset prices (bonds, stocks and houses) will fall in price.
I am not even going to try to predict the potential outcome from a breakdown in NAFTA, shifting power balances and possibly a war in the Middle East, the Trump factor, North Korea, China, Russia, cyber terrorism and bubbles.
When asset prices fall (and they inevitably will), investor portfolios and net worth will take a hit. Balanced ETF portfolios, which have been the latest rage, won't be enough to protect them.
Investor apathy and complacency (which has escalated with the prices of stocks with a false sense of security) has allowed risk levels in portfolios to reach lofty levels, significantly higher than most investors actually realize.
The concept of risk management, which has taken a backseat to passive investing in recent years will move into the spotlight.
High Rock phones will be ringing (as they did in early 2016).
Want to get ahead of the herd, protect your net worth and financial goals before the drama begins (which is how we manage our own money, in the same way that we manage our client's money)?
We have low cost, fiduciarily responsible, risk and wealth management with tailored, personal investment strategies to suit your specific goals.
Why put your financial future at risk?
Canadian households added to their debt burden in the third quarter of 2017. Household debt to disposable income is up to $1.71 for each dollar of income earned (a new high). Importantly, while debt is rising, the value of household assets (savings, investments and house prices) remained the same, which can be a dangerous situation if this uptick (chart above) continues (if the value of assets turns lower). Definitely a concern for the Bank of Canada as it weighs the outlook for interest rates in Canada. The two 1/4% increases in Q3 does not appear to have had much of an impact on Canadian's desire for debt. In the short-term, rising debt levels are good as increased household spending helps economic growth. However, that debt can be a longer-term problem, especially if the economy slows and the ability to service the debt forces asset sales (and asset prices fall, see 2008).
Meanwhile, south of the border, The US Federal Reserve raised rates by 1/4% for the third time this year and appear to be prepared for another three 1/4% increases in 2018:
Should the Bank of Canada follow the Fed's example (and they are never really that far behind), that might also create debt servicing issues for Canadians.
Our work (at High Rock) is to look beyond the current hype / noise built into "record setting" equity markets at those things (not necessarily good) that are not being given appropriate consideration in the current determination of value.
Our work is intended to find opportunities for growth while remaining aware of all the underlying risks and making prudent investment decisions for ourselves and our clients within the context of the goals that we have set for ourselves.
So it is very important to pay attention to what they are telling us. Whether or not the over-used cliche that "this time it is different" is or is not the case.
The US Federal Reserve will announce that they are raising interest rates by 1/4% at 2pm today. Of that there is little doubt.
What will be more important will be the pace of future interest rate increases and how they will impact economic growth into the future. The flattening of the yield curve has been something that we have been discussing (and you all may think over-discussing) lately. We certainly bring it up on our most recent weekly video (dressed in our holiday appropriate attire).
Rising interest rates will not be benign as financing record amounts of US household debt becomes more difficult without rising wage growth to help it. It cannot help but deter the consumer and the consumer is 2/3 of the US economy.
The consumer has been very confident of late and unemployment is at multi-year lows and they have been told by their President that there is better stuff yet to come. There are, however, a number of pretty smart economic minds that might argue the impact of the new tax reform on the average consumer over time is not what it is being billed as.
The flattening of the yield curve is the real story. Bond markets are telling us that as short-term interest rates go up (without economic growth spurring inflation), that there is the potential for economic slowing (despite the current level of consumer confidence).
Stock markets appear to be ignoring the bond market's warnings and focusing on all the apparent good news (expected earnings growth, etc.), while paying limited attention to whatever bad news lurks in and behind the headlines.
We (at High Rock) know that it is folly to ignore the warning signs and will be ultra-cautious heading into 2018 as to how we want our and our client's money to be put to work.
Stronger than expected economic growth for 2017 does not necessarily guarantee stronger growth (and earnings) for 2018 and the bond market is telling us that. It is a behavioural trait of us mere mortals to expect what has transpired in the recent past will continue on into the future and many of us who have not been on the current bandwagon may feel tempted to jump on board.
We shall resist that temptation and allow our 35 plus years of experience in financial markets to be our guide.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist