Tuesday, 5 August 2014

I For One Welcome Our Robot Overlords: The New World of Investment Advice and Asset Management


 Before I let you read the rest of this post, I want us to agree on a set of facts:

1. It is extremely rare (but not impossible) for any one investor, investment professional, or investment management company to consistently and reliably outperform the market for any appreciable length of time.

2. The only way to profit from this legendary investor’s tactical brilliance is to begin investing with him or her very early on in his or her career, which necessitates identifying him or her before said brilliant career actually takes off in any appreciable way.

3. If 1, then 2 is unlikely at best.

4. If (almost) every investor, investment professional, or investment manager can only - at best - be expected to deliver long-term returns at about the same rate as the market in general, and only by sheerest luck (in most cases) will he or she happen to turn out to be of the rare breed mentioned in 1, then the only meaningful differentiation between everyone else is the amount of money it costs to invest with them.

4.a) The difference in cost to invest between any two investment professionals, since it must not have anything to do with investing acumen, must be explained by the amount of “other stuff” that professional does: (real) tax planning, (real) financial planning, (real) estate planning...you get the picture.

If we can’t agree on these basic points, then you should probably just find something better to do, because you’ll likely get outraged and/or defensive about what I’m going to say next:

Why on earth are Canadians still paying 2% for “investment management” when there is no (real) “other stuff” offered?

 

(But first, a word on the proper place that investments should hold in the grand scheme of things:

Your investment portfolio, however large or small, is a tool that exists to help you accomplish your goals whether you hope to buy a house, save for retirement, pay for some of your kids’ education, or move to a farm and grow your own food.

The investment decisions you make will have less impact on your ability to achieve those goals than the amount you discipline yourself to save, the speed with which you pay off debt, and the conscious, everyday choices you make in your spending. In fact, how you spend your money month-in and month-out is the single most important financial characteristic. By comparison, investing is a small piece of your life, yet it gets a disproportionate amount of attention from financial professionals, more than efficient dept repayment, more than goal planning, and far, far more than cash flow and budgeting.)

So why is “investment advice” the first (and sometimes only) thing most of us think about when we think about financial planning?

 

The reason that such a little thing gets such big attention is because there’s money in it. Lots of money. “Wealth Management” is what pays the bills for banks, you know. That, and it’s a lot sexier to talk about than cutting back on your grocery bill or starting to save regularly for your next property tax installment.

Not a single word eof what you just read is news to you. If you’ve spent any time online, or read any of the good Canadian personal finance books out there, you know that what you’re supposed to do is open up one of the online brokerage accounts, buy the ETFs in the Global Couch Potato portfolio, set a reminder to rebalance once a year, and get on with your life.

The problem is this: Do-it-yourself asset management sounds intimidating, can be time-consuming, and tempts people who shouldn’t tinker to tinker. It isn’t for everyone, and for those who want to ask a question now and then, who want some hand-holding when it comes time to set up and start trading across TFSA, RRSP, and/or non registered accounts, or who just want someone else to do it, please, and let me get on with the things I do best...well...

You can go to a bank or a mutual fund company:

 

The first place most of us turn to when we start thinking about investing is the army of bank/insurance/mutual fund company advisors who - in the face of all the evidence - still believe that paying 2.3% in fees for their company’s mutual funds is somehow a more effective long-term investing strategy than 0.30% for index funds or passively managed ETFs. These advisors believe that the extra money tacked on to the investment management fees in the form of up-front and trailing commissions pays them to give you advice, and will fight you tooth and nail if you even mention indexing.

Their advice - however well-meaning - depends on the amount of training they’ve received from the institution that’s paying them to sell you their own line of products, by the amount of time they are required to spend chasing new clients and new money, and by the likelihood that they’ll stay in their job any reasonable length of time. Generally, if you want to rebalance your investments annually, you’ll need to call, set an appointment, dictate exactly what you want, and re-hash all the same arguments over index funds you had the first time.

The upside, of course, is that you don’t have to do it yourself, and every town has at least a few people willing to sit across the desk (or kitchen table) from you and take your money.

Okay, not the bank. How about a real asset manager:

 

For a real asset manager, one who doesn’t have regional sales targets to meet, who can craft and monitor a portfolio of securities not limited by a single institution, who know the specific goals, constraints, and strategies that you’re facing with said portfolio, and who will talk you down during times of market turmoil and rein you in when everyone else is losing their minds with greed, you generally need to have already saved between $250,000 and $500,000, and be willing to pay around 1% in annual fees, which should go down the more wealth there is to manage.

It’s a real to him who has, much will be given kind of scene.

These folks are harder to find, and not all of them are created equal. Some of them are in the game for the money, and some are in it for reasonable compensation. Believe me, there’s a difference, and there are many more of the former than the latter.

Oh. I don’t have that kind of money yet, and 1% still sounds kind of high.


Right between expensive non-advice and expensive real-but-hard-to-find advice is the implementation gap. Canadians who know something’s not right with the advice they’re getting at the bank, don’t have $500,000 accumulated, and know they’re not interested or disciplined enough to build and rebalance their own investment accounts are out of luck if they want a low-cost, passively managed, common-sense portfolio that they can throw money at and get on with their lives.

Enter the robo-advisor, or - more properly - the “advisor who doesn’t pretend to deliver on most of the 'other stuff' outside of their area of expertise - investments - and has much lower overhead than your traditional advisor and can therefore offer their services at a reasonable cost”. These are companies like WealthSimple, WealthBar, and Nest Wealth, who are (or are in the process of getting) licensed and regulated the same way that the banks and asset managers are, but who have slipped the bonds of brick and mortar and can set up and rebalance your portfolio of index ETFs for under 1% from the comfort of your own laptop. That’s a better deal than the rich folks are getting.

Some financial media types and many protectionist old-school investment managers invoke the spectre of “why would you let a computer program manage your money for you” whenever the topic comes up, which is probably why they’re hit with the robo-advisor label in the first place. None of the companies I mentioned above fit the fear-mongering description given in this article (as an exemplar of many similar articles, albeit American). Rather, these are investment management companies with real-life people ready to talk you through your asset-allocation, risk tolerance, tax-optimizing, and rebalancing decisions.

For most of us regular Canadians, the best thing we can do with our investments is set an asset allocation target that fits with our true ability to handle risk and our tax situation, get the fees as low as possible - which usually means index investing - and then close our eyes and throw money at them. Ideally we shouldn’t even have to rebalance at all, because every time we have the opportunity to benefit from rebalancing (selling a recent winner to buy a recent loser on the cheap) we also have the opportunity to Not Rebalance. Heck, I talk, write, and read about investing every day (see above), and I still had a hard time pushing the button to sell equities and buy fixed income this past spring.

If you let these not-robo-advisors do their job, your job would get very, very simple: make money and save some of it. No more trying to outwit the market because “interest rates are going to go up and I don’t want to be in bonds”...sometime in the past five and next five years. No more looking at how your equity mutual funds grew over 2013 and assuming that it was because of the amazing skill of the mutual fund salesperson you met with in 2012.

Invest like this, and your portfolio goes back to being a tool to help you accomplish the life you want, and shrinks in importance back to its proper place in the grand scheme of life, the universe, and everything.

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 Advisor.ca, 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

OPTIMIZE!

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.

Ridiculous.

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 Mint.com 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 Mint.com

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.
Related Posts Plugin for WordPress, Blogger...
Fees | Privacy | What to Expect
© Spring Personal Finance 410 Bay Street, Gravenhurst, Ontario, P1P 1G9. All Rights Reserved.
Sandi Martin is a fee only financial planner who specializes in business and personal budgeting, investment advice, and debt management strategies.
Telephone, internet, evening, and weekend appointments are available to clients across Canada.