Friday, 11 July 2014

Because Money Episode 20 | Side Gigs and Extra Income

In this month's episode of Because Money, we get a chance to grill Robb about his side income, and -  as usual - I'm the one advocating caution when it comes to using your spare time to start a side business for extra money.

Unless you're really clear about your capacity and priorities, a side business can become a huge black hole of both time and money, without much to show for it in the end.

Wednesday, 9 July 2014

Sorry, Who Is It That's Suffering? Advocis Doesn't Want Embedded Commissions Banned, Because Financial Advisors Will Suffer

Sometimes, someone says something that is so egregiously wrong that it can’t be ignored. Take, for example, this piece, published this afternoon on, an online magazine for financial advisors in the investment and insurance industries, which elicited this (totally articulate) reaction:
The piece in question? This:
"Don’t Ban Commissions, Says Advocis”

If Canada completely bans sales commissions like the U.K. and Australia, advisors and their clients will suffer.

This was the general consensus at an Advocis and PwC event held yesterday in Toronto.

In Australia, the Future of Financial Advice (FOFA) reforms banned embedded commissions, established a best interests legal duty and expanded requirements regarding fee disclosure, says Advocis. These changes increased the costs to serve investors by more than 30%, and compliance costs for advisors have amounted to AUD$700 million so far, finds a PwC survey of small- and medium-sized (SMB) advisory firms.

And in the U.K., the number of advisors dropped 25% due to similar regulatory reforms.
The investors that will have the most difficulty affording fee-for-service arrangements are those in the low- to middle-income range, finds the survey. And those clients, who typically have assets under $100,000, make up 80% of the investor market.

Meanwhile, 12% are those with assets between $100,000 and $500,000; 4% have between $500,000 and $1 million; and 4% have $1 million plus, notes the survey.

“We need a system that serves investors at all income levels,” says Greg Pollock, president and CEO of Advocis. “Given Canadians’ concerns around cost of living and retirement readiness, it’s critical that more people are able to seek professional financial advice.”

Also, there could be an economic impact if Canadian advisors follow the footsteps of those in the U.K. The SMB sector employs 182,000 people in Canada, and contributes $19 billion to the GDP (or 1.1%). This is greater than the auto (0.9% of GDP), aerospace (0.6%) or pharmaceuticals (0.3%) industries.

The experts provided an alternative to simply banning commissions.

“If we can get to a disclosure model that’s appropriate, then consumers could make the choice,” says Pollock. “If my embedded commission is $1,000, or whatever that number is, then you have a choice, as long as they disclose that.”

Meanwhile, Byren Innes, senior strategic advisor at PwC, suggests advisors get ahead of regulatory changes by adapting the current frameworks; getting educated and demonstrating their expertise to clients; and responding to the change in client preferences by becoming more accessible online.
Let’s talk about the kind of professional financial advice that 80% of low-to-middle income Canadians with less than $100,000 are getting, and should apparently be overjoyed about, notwithstanding the industry-funded study quoted above:

 1. Canadians pay the highest equity fund fees, highest money-market fund fees, and the third-highest fixed-income fees of the twenty-two countries surveyed in this Morningstar report. On average, Canadians pay in excess of 2% in mutual fund fees, including 1% or so in embedded commissions to the advisors who sell them the investments and the companies who make them.

 2. Despite the availability of passively managed mutual funds and ETFs with annual fees in the 0.30%-0.50% range, the overwhelming majority of those low-to-middle-income Canadians that Mr. Pollock is so very concerned about are paying in excess of 2% (of which 1% or is that embedded commission we’re all going on about) for actively managed mutual funds that are underperforming the market as a whole. That means that instead of paying $500 a year for investments, they’re paying $2,000.

 3. That extra $1,500 is supposed to be buying them financial advice. What kind of financial advice do low-to-middle-income families need? Save regularly, rebalance dispassionately, and keep your head during cycles of fear and greed. Investment advice comes way down the list after cash flow and budgeting, debt repayment and avoidance, setting goals, and what to expect in retirement, and I’ve yet to meet a commissioned advisor with hours to spend on an individualized plan for someone whose sales fees won’t even pay the office lease for the month.

 4. The overwhelming majority of that 80% of Canadians are NOT receiving the kind of financial advice that will help them. In most cases, they’re getting told what mutual funds to buy and nothing else. Is that really worth $1,500 each and every year, when a fee-for-service planner can charge less than that for one engagement and set them on the path of healthy finances for life, without that icky feeling that the advice they’re giving is handcuffed to the products they’re selling (and receiving commissions for)?

Yes, there’s an implementation gap. Not everyone can transfer their savings to a self-directed brokerage and go on their merry way without any bumps in the road, and banning commissions to advisors isn’t going to change that or help them get the affordable investment advice they need (although the rapidly approaching shake up in asset management business models hopefully will - more on that later).

You know what banning embedded commissions will do? It’ll end the illusion that advisors on the commission system are anything more than salespeople, no matter how well-intentioned they are, and it will force them to charge fees more in keeping with the actual quality of advice they're giving, rather than the product they're selling.

Thursday, 12 June 2014


Financial planning is misnamed. It really should be called Figuring Out How Much What You Want Out Of Life Will Cost And How to Pay For It By Finding The Happy Medium Between Doing What You Have To Do And Doing What You Want To Do.

I imagine this will never take on.

Because sensible.

Don’t get me wrong: when I say financial planning, I’m not adding “by working with a professional” under my breath. The most important, most necessary part is the navel-gazing that only you can do. No amount of tax efficient saving or avoided debt can compensate you for an unfulfilling life, and no financial planner is doing anything that you can’t learn how to do for yourself. Anyone that tells you different is selling something (and it’s probably mutual funds).

In fact, I’d go so far as to say that it’s entirely possible to live a happy and fulfilled life even if you pay interest on a credit card, underperform the market because of poor decisions or high MERs, or buy a house in an overpriced market, or retire with less than the optimal amount of money saved up. It might be harder than it has to be, but millions of people are doing it, and it’s rare to hear “I wish I’d earned more money and spent less time with the kids” on a deathbed.

And then there’s that word. Optimal. It’s such a science-fiction villain word, and I can’t help but imagine armies of shiny metal robots, marching through your bank statements and shouting OPTIMIZE! before blasting away anything that doesn’t add to your net worth.

I like robots. I like things to be tidy, and logical, and - as much as I rail against the word - optimal. It’s part of my personality, which helps explain why I like spreadsheets so much. But life with three kids isn’t tidy, it sure as hell isn’t logical, and money has functions more important than giving me a grade for how well I’ve lived my life.

Call me unambitious, but I want to be happy for all of my life, not just when I’m 67 and retired. I don’t want to save or pay down debt so aggressively that I do whatever it takes now to get a financial A+ thirty years from now, and that means consciously balancing my spending between what we need and want now versus what we need and want in the future. Sometimes that means recognizing that there are only so many clothes a toddler can wear between laundry days, sometimes it means forgoing date night at a restaurant in favour date night in the kitchen, and sometimes it means hiring someone else to clean my house because I’m better at spreadsheets than floors.

Right about here is where those of you with easier choices to make or online reputations to uphold are reading this as if I just said that I like to travel so I’m putting an all-expenses paid trip around the world on my credit card because YOLO.


Almost every money celebrity out there wants you to believe ardently in the concept of short-term suffering for long-term gain, but Dr. Yonni Freedhoff has it right (albeit about dieting rather than money): there’s only so much suffering someone can take (podcast). Your job is to take a realistic look at what you want out of life and - when you can’t have it all - consciously pursue the things that make you happiest over the things that you might otherwise pursue just because they’re the default options.

Most of us want to do the best we can with what we’ve got. Some decisions are easy to make, some are easy to understand but hard to follow through on, and some are incredibly difficult - both to make and to live with. If you’ve been spending more than you make for years, it will take more than not spending to redress the imbalance, because you can’t Not Spend forever.

Here’s the crux of the issue: there is a happy medium between optimal and realistic, it’s different for everyone, and the only person who can figure it out is you. Someone like me can help clarify the issues and prioritize the trade-offs, but - especially when the trade-offs are hard - you’re the one who has to live with them.

Wednesday, 26 March 2014

On Hiring a Financial Planner

The folks at interviewed me a few weeks ago about working with a financial planner, getting started on a financial makeover, and advice for beginners on investing. 

When enlisting help to manage your money, what should you look for in a planner?

You should look for someone who will emphasize your goals as the starting point, and who acknowledges that life is messy, planning is imprecise and no one can see into the future. Your work with a planner should equip you to make ongoing decisions for yourself down the road by coming to a very clear understanding of your own financial situation, the direction you plan on heading, and the values that are important to you.

For someone who wants to start managing their money responsibly - whether they're just starting a career in their 20s or getting ready to retire in their 60s - where's the best place to start?

The best place to start is the place you want to end. There's no sense in starting with a budget or a financial plan without being absolutely clear about what's really important to you, what you'd like to accomplish and the values you want to build your life around.

What do you think are the biggest mistakes people make when creating a budget? How do you coach them to make a budget they'll stick to?

People starting out so often make the mistake of believing that creating a budget will effect a change right away, and get discouraged the first time they get off track. Sticking to a budget is a matter of training and discipline, and it's a rare person that gets it right the first time. My coaching is always to evaluate where they go wrong and be prepared to adjust course along the way, instead of throwing up their hands in frustration and giving up on purposeful spending...Read more at

Friday, 21 March 2014

Because Money Episode 14

Despite +Robb Engen's absence from this week's podcast+Jackson Middleton and I had a great time talking with our guests about why regular Canadians should care about the regulation of financial advice. I've written about the incentives that are holding even the most decent and ethical commission-based financial advisors from giving the best advice to clients many (many, many) times, most recently here, here, here, here, and - my personal favourite - here, so I'll spare you today.

 +John Potato has an excellent follow-up post Regulation of Financial Advisors up on his blog Blessed by the Potato, in which he nails the issue:

"The system needs to be reformed so that someone with no knowledge and no way to evaluate quality in advance can go to get advice from someone and trust in that advice (and get reasonable value for the fees that they pay while they’re at it). And really the best way to build trust for the lay public is to have a trustworthy expert give the thumbs-up — that is, regulation."

Our other esteemed guest +Noel D'Souza has also written about the issue on his shiny new blog Do These Look Even? (and I'd bet all of my money that he'll write about it again, so stay tuned):

"For far too long, Canadians have had trouble accessing the financial advice they need,  as opposed to the product sales focused “advice” the industry usually sells. This is one of the unfortunate side-effects of a commission-based advisory model that ties advice to product sales."

As for the rest of our opinions, well, you'll have to watch the episode. (That is, until we pony up for transcripts. Again - and I'm sensing a theme here - stay tuned.)

Thursday, 6 March 2014

Your Financial Advisor Might Be A Nice Person, But... (Because Money, Ep 13)

Last week's CBC Marketplace episode Show Me The Money took an average investor (with a hidden camera and glowing lights in her pants) into BMO, CIBC, RBC, Scotiabank, TD, Dundee Securities, Edward Jones, Investor's Group, Money Concepts, and Primerica shopping for advice on what to do with a $50,000 inheritance she'd just received. 

Of course we had to talk about it on Because Money, and - graciously - +Preet Banerjee agreed to reprise his expert role from the Marketplace episode to talk a little more about the complicated world of financial advice, his surprise over the high rate of non-compliant and pretty horrible advice given, and to expand on his view that there are really good people out there working as financial advisors who oughtn't be lumped in with the bad ones, and that what the industry really needs is a good trimming of the "dead wood" in the industry.

I - unsurprisingly, I suppose - disagree. The investment advice industry, conflated as it is with the broader world of financial planning, looks from the outside as though it's an advice industry that happens to offer products that help you implement your financial planning goals. Those products pay for the planning you receive, which is why Preet made the case that those with smaller amounts to invest are better off paying a commission on their investments instead of paying directly for their advice.

But those small investors need more than just investment advice. In my experience (and in friend of the show +Noel D'Souza's) the new/small investor's needs are more heavily weighted to the goal setting, prioritizing competing goals, and cash flow planning than on the investing advice. They're looking for more than cursory advice there, which is why reliance on advisors paid with trailing fees doesn't fit.

Remuneration for that kind of advisor is tied to the amount of the investment, and results in outsized emphasis on investing alone for clients who need more than that, while at the same time not creating much of an incentive for the advisor to spend more time on such a small account when there are more lucrative clients waiting.

Smart organizations don't spend any more time on loss-leader activities like cash flow planning, debt paydown, or behavioural coaching than they have to. The nice person across the desk from you has a nice manager who has a nice district vice president who has a nice regional manager, and every one of those people has one job: make the most amount of money for the company in the least amount of time without making any egregious errors, running afoul of securities regulators, and generally being as feel-good, PR-friendly as possible.

An episode like this one - while illuminating for investors  - is another chance for the investment advice industry to blame a few bad apples or poorly-trained but well-meaning individuals and go merrily on their way without making it any easier for consumers to find a source of advice with a price tag they can evaluate fairly.

Thursday, 20 February 2014

The Because Money Podcast | Episode 11: Home Buyer's Plan

In this week's episode of The Because Money Podcast, we finally got to fight a little. Agreeing all the time is so boring, isn't it?

What did we cover that was so controversial? Only the Home Buyer's Plan, that allows you to withdraw up to $25,000 tax-free from your RRSP and use it as the downpayment on your first home (or the first home you've owned in four years, or a home you're buying with or for someone with a disability...the complete list of conditions is in this list of resources we put together.)

Jackson's seven years of mortgage lending as a broker has convinced him that hardly anyone uses the program. Robb's extensive research has convinced him that relatively few people use the program, and that the number is dropping every year. My seven years of mortgage lending at the bank has convinced me that people do use the program, even if not to it's full extent, and that there's no good reason not to - if owning a home is a good idea for you (which is a whole other kettle of fish).

Detractors of the HBP decry it as either stealing from your retirement to buy a home, or else such a miniscule amount in the face of higher house prices than when the program was implemented in 1992. They - essentially - boil down to this argument "Canadians are too dumb to save for their retirement and a home, and they're too focused on buying a home anyway, and even if they did buy a home it would be too expensive, so let's end the program."

That's nonsense. I recognize that there are a lot of Canadians whose financial lives could be described charitably as a hot mess. But I'd like the financial media to recognize that A) they probably know it, and B) preaching from your mountaintop isn't going to change anything.

The ability to save your pre-tax income for a downpayment on a home is a good thing. Buying a home can be a good thing. Saving "only" $25,000 alone or $50,000 as a couple might be a smaller than ideal amount to put down on a house purchase, but it's still tax-deferred savings* AND tax-free growth until the right house comes along, so still a good thing.

The issue isn't that Canadians aren't saving enough (although many aren't), and it's not that the Home Buyer's Plan incentivizes them to withdraw from their retirement savings to purchase a home (although it does). The real issue is this: if you can't afford to save at least $1,666 a year (each) after you've purchased a home, then you can't afford your house.

The solution to the Home Buyer's (Are Stealing From Their Retirement) Program isn't to end the program; it's this: when you're sitting in front of your banker or broker, listening to them tell you how much mortgage you can afford, listen politely and then go home and do your own calculations.

*As an aside, just because many Canadians saving for a first time home purchase are young, and - theoretically, at least - earning less money than they will in their peak earning years, it doesn't necessarily follow that they shouldn't be contributing to an RRSP. They don't have to claim contributions as deductions in the year they make them, you know.

As always (except sometimes), join me, +Jackson Middleton, and +Robb Engen on Wednesdays at 9:30PM EST for The Because Money Podcast. You can watch live and tweet at us using the hashtag #becausemoney, or take a half an hour to watch it later. Most days you can find one (or all) of us on Google+ or Twitter to suggest new topics or rake us over the coals for our egregious errors. Thanks for watching.

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Sandi Martin is a fee only financial planner who specializes in business and personal budgeting, investment advice, and debt management strategies.
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