Low future returns? The coming bull market in advice

A bull market in advice? This novel idea is the basis of my latest Motley Fool blog, which came out of the 2017 Vanguard Investment Symposium held this Tuesday.

Hopefully, the title is self-explanatory. Click on the highlighted text to access the whole blog: Lower future returns from balanced portfolios means a bull market in advice.

Click through to get Vanguard’s forecasts for future returns. Suffice it to say that they don’t believe the next five years will be as good as the last five years have been for balanced investors.

All of which means good financial advice will be at a premium.  Naturally, Vanguard believes that the lower expected future investment returns are, the more important it is to reduce costs and taxes, which of course its low-cost index funds and ETFs facilitate. But it also believes advisors can help investors by addressing the so-called  “behaviour gap.” It’s been well documented that poor investing behaviour (buying high, selling low) are destructive to returns, which is why a good financial advisor can more than recoup his/her fees.

Advisors can add 3% value per a year

Many fee-based advisors use the kind of investment funds Vanguard provides and Vanguard believes good advice can “add value” of roughly 3% per year to clients’ investment returns.

Behavioural coaching is the single biggest value-add: 150 basis points (1.5%). “Staying the course is difficult,” but “a balanced diversified investor has fared relatively well,” said one Vanguard presenter quoted in the Motley Fool piece, Fran Kinniry.

Behavioural coaching is followed closely by 131 beeps for cost-effective product implementation (using low expense ratios). This alone can add 1 to 2 percentage points of value, Vanguard says, attributing the finding to “numerous studies.” Rebalancing accounts for another 47 beeps, and Asset Location between 0 and 42 beeps (as opposed to Asset Allocation, which it says adds “more than 0 beeps.”)

A proper spending strategy (identifying the order of withdrawals in the decumulation stage) accounts for another 0 to 41 beeps. All told, the potential value added comes to “about 3%,” Kinniry says.

Vanguard says a “strong move to fee-based” compensation is accelerating. In 2015, 65% of advisors’ compensation came from asset-based fees, while wealthier investors are “most willing to pay AUM-based fees.” Gradually this will ‘flow down” to less well-heeled clients, “as smaller balances can now be well-served” in a fee-based model because of scale and technology.

Using Cerulli data from 2015, Vanguard estimates the median asset-weighted advisory fee is 1.39% for the mass market ($100,000 assets), 1.28% for the middle market ($300,000), 1.09% for the mass-affluent market ($750,000), 0.92% for the affluent market ($1.5 million to $5 million) and 0.70% for the High Net Worth market ($10 million or more).

On average across all clients, the median fee is 1.07%.


Bonds: Ain’t no cure for the summertime blues

U.S. 10-Year vs. 10-Year German Bund
By Kevin Flanagan , WisdomTree Investments
Special to the Financial Independence Hub

Since Election Day, the focus in the U.S. Treasury (UST) market has been essentially domestic-driven. In other words, market participants have been setting their sights on potential fiscal policy developments and, of course, the latest actions from the Federal Reserve (Fed).

However, as the calendar turned to summer, investors were greeted with a new twist for Treasuries: more-hawkish-than-expected rhetoric coming from other developed markets’ central banks, elevating global bond yields in the process. The question that lies ahead on the rate front is whether words become deeds; if so, the fixed income arena could be in for a case of summertime blues.

Two of the more noteworthy developments from the global central bank perspective involved the European Central Bank (ECB) and the Bank of Canada (BOC), each occurring in just the last few weeks. The genesis was at an ECB forum in Sintra, Portugal, where President Draghi made remarks that the bond market viewed as being on the hawkish side.

Although the ECB tried to walk back the comments, stating they were misinterpreted, the damage was done, and yields nevertheless finished higher. Interestingly, the FOMC minutes released early in July were a nonevent, but the ECB minutes were a different story, as the headlines stated that policy makers “discussed removing the easing biases in their policy communication,” specifically on their Quantitative Easing (QE) program. These news events were accompanied by earlier comments from BOC president Poloz that intimated that Canadian policy makers may be considering a rate hike at one of their upcoming meetings.

Unexpected shift in tone

Needless to say, the shift in tone was not expected in the global bond markets. Continue Reading…

Mid-year review of Aman Raina’s Robo Advisor portfolio

By Aman Raina, SageInvestors

Special to the Financial Independence Hub

Aman Raina

As we cross the mid-pole mark in 2017, it seems like a good time to check in on my Robo Portfolio that I created two and half years ago.  For those jumping on for the first time, I wanted to try to find out if this new type of investment service which was taking the industry by storm a few years ago does any better job of creating wealth for investors compared to the traditional methods of investing (i.e. Do-It-Yourself or having a professional manage your money on your behalf).

I chose one Robo Advisor company here in Canada and invested $5,000 of my own money. When I set up the account I answered a series of questions about my financial literacy and risk tolerance. ROBO took my responses and crafted a portfolio that it felt reflected my profile.

As I am pretty experienced with investing and have a long-term investment horizon, ROBO determined that a portfolio mix of 85 per cent stocks and 15 per cent bonds would work for me. From there ROBO carved out allocations to a variety of equity and bond assets using ETFs to provide the appropriate exposure.

The objective of this exercise is to observe and blog about the whole experience and share with you any unique insights about the service. Most importantly I wanted to see what kind of returns this type of portfolio can generate. My experiment is by no means scientific but I think there is a lot that we can learn about this service if we go beyond the slick websites and marketing to truly look underneath the hood to see how these portfolios are managed.

Performance still reasonable

When we last checked in with my ROBO portfolio in late January, it was chugging along rather nicely, generating somewhat decent returns. It appears to be continuing the trend. Since the start of the year, the ROBO portfolio is up 5.5 per cent. Since I set up the account, the portfolio is up 14.2 per cent. The portfolio is up $298.71 this year, of which $53.59 was in dividend payments. Again, pretty reasonable for me. When you look at portfolio breakdown most of the returns have come from US stocks, Foreign stocks, and Emerging Market stocks.

ROBO Portfolio - 6 month performance chart

ROBO Portfolio – 6 month performance chart

ROBO portfolio - Asset Allocation breakdown - July 3, 2017

ROBO portfolio – Asset Allocation breakdown – July 3, 2017

Asset Allocation: Breaking News! 

It all seems decent enough; however, shortly after I posted my report in February, the portfolio has gone through some changes. Continue Reading…

Opinion: Morneau rings death knell for entrepreneurial spirit in name of “fairness”

Finance Minister Bill Morneau

By Trevor Parry

Special to the Financial Independence Hub

Liberals are majestic creatures, always knowing what is better for the masses, and careful never to swallow a dose of their own medicine.  One can conjure up the Hogwartsian image of the Little Prince and “Red” Billy Morneau stumbling hand and hand through the torch-lit catacombs of the Department of Finance, where, to their great joy, hidden behind the cobweb-covered portrait of Alan MacEachen they find a secret passage to Chamber of the Knights of the Just Society.

For it can only be a long forgotten cell of Birkenstock-wearing discredited ideologues, clutching fervently to their well-worn copies of the Carter Commission Report that have vomited forth Tuesday’s discussion paper decrying the apparent abuses perpetrated by the shareholders of private corporations.

Mr. Trudeau likely can’t spell dividend, and Mr. Morneau dare not ask his father how his tuition to the LSE (coincidentally, founded by the Fabian Socialist Society) might have been funded. For these two, along with a good portion of the Liberal caucus, are completely unaware of the sacrifices that are made to create a successful business, or create a professional carreer, and who frankly shake hands with the Holy Spirit of Hypocrisy on a daily basis.

Entrepreneurialism is a plague to Liberals

No, to the Liberal Party of Canada entrepreneurialism is a plague to be eradicated, replaced by a compliant corporate oligopoly working in symbiosis with a burgeoning civil service, and of course legions of ravenous consultants.

The  Department of Finance Paper seeks to target corporate tax planning strategies that have been in place for over 30  years. Paying dividends to adult children, parents and other family members in lower tax brackets, often as a measure of generosity or as a means to pay for higher education (something Mr. Trudeau aspired to but could not achieve), multiplication of the capital gains exemption to preserve a life’s work, and realizing deferral as a means to create capital are apparently at odds with the omniscient and ubiquitous Liberal goal of “fairness.”

Tax fairness should be holding all to the lowest possible measure of taxation, not subjecting everyone to the highest. For in Trudeau’s lexicon fairness is synonymous with mediocrity.    For it is an unassailable lesson of history that the fundamental precondition for the creation of economic dynamism is the creation of surplus savings and capital by the entrepreneurial class. The tax strategies that Mr. Morneau and his Office of the Five Year Plan (formerly known as the Department of Finance) targeted on Tuesday had in some tiny measure allowed for that.

In Liberal Canada economic results must be ordained, not by a higher power, or by the ability or drive of the individual but by a collection of over-entitled, mentally ossified Liberal politburo. By every measure possible; some of which arguably violate the Charter of Rights and Freedoms, in that they directly and unabashedly discriminate against familial relationships, anyone who dare exceed the rigid definition of “middle class” (which for most of the country is “lower” middle class at best) will be assaulted by the great level of an over-50% tax rate. The product of this fairness will be the corpulent rewarding of Liberal sacred cows without even the pretence of accountability.

Continue Reading…

Millennial Money: How Daydreaming can help you Budget

If you can dream it, you can achieve it” is a saying more often seen on an inspirational Instagram account than in a financial blog. While I am loath to agree with the sentiment of a mere bumper sticker, dreaming really can be an excellent tool for those struggling to get their financial futures in order.

I began to think about the value of dreams in achieving financial freedom a few months ago. From there I decided to do some research on the subject. What is it about having defined dreams that can help solidify steps needed to achieve goals? When, if ever, is dreaming going to hurt instead of help?

I came across this blog post from ‘The Lady in the Black’ site, which includes a variety of guest bloggers all chiming in with that they consider the true value of using our daydreams to achieve our financial goals.

It’s safe to say we all love a good daydream once in a while. It can be an excellent way to escape the day-to-day uncertainty in our lives. More importantly, however, daydreaming can be an opportunity to really discover what is most important to your future financial wellbeing, and can even help you plan a concrete goal for that future.

Continue Reading…